[NEW YORK] The Chinese yuan's 6 per cent decline over the past five months is hardly anyone's idea of a crisis. On average it comes out to a drop of less than 0.04 per cent a day. But behind the scenes, Chinese policy makers are unleashing a torrent of measures to stabilise the currency and prevent it from tumbling.
Added up, these efforts rival some of the biggest currency defences seen in emerging markets over the past two decades. Here's a quick look at the central bank's most aggressive steps.
Hong Kong has become a key focal part for policy makers. Over the last two days, they bought enough yuan there to push overnight borrowing costs for the currency to a record 67 per cent on Tuesday from just 4 per cent at the end of last week.
These rates, designed to discourage speculators, are even higher than those at the peak of Russia's defense of the ruble in 2014 and Brazil's intervention in 1999.
In propping up the exchange rate, the People's Bank of China also burnt through more than half a trillion of dollars in foreign reserves in the past 12 months, cutting them to US$3.3 trillion.
The draw-down was almost equivalent to the entire stockpile of Switzerland, the world's fourth largest holder. Regulators also went to great lengths to tighten capital controls, cracking down on illegal money transfers and restricting lenders from conducting some cross-border transactions.
Among its emerging-market peers, the yuan remains one of the top-performing currencies over the past year against the dollar, yet Chinese policy makers are acting with an increasing sense of urgency. At stake is the financial stability of the world's No. 2 economy - disorderly depreciation could fuel more capital outflows, which, according to data compiled by Bloomberg, already approached US$1 trillion in the 12 months through November.
"They are really trying to stop the panic," said Lucy Qiu, an emerging-markets analyst at UBS Wealth Management, which oversees US$1 trillion, said by phone from New York.
By intervening in the Hong Kong market, the PBOC is forcing the offshore rate to converge toward the stronger onshore rate in an effort to anchor expectations among overseas investors.
Officials also stressed that the aim is to keep the yuan basically stable against a basket of currencies, rather than pegging it against the rising dollar.
Deterring speculators and attracting investors with off- the-chart rates can help contain a currency crisis, but it can also send an economy into a tailspin by cutting companies and consumers off from credit. That is unlikely to be the case in China.
The yuan loan increase in Hong Kong would have less impact on the mainland's economy, where the benchmark seven-day interbank rate remains stable at about 2.4 per cent.