PBOC extends yuan support after offering reassuring rhetoric

CHINA’S central bank extended support for the yuan via a stronger daily reference rate, a day after its flagship newspaper reassured investors that authorities have sufficient ammunition to stabilise the weakening currency.

The People’s Bank of China (PBOC) set its so-called yuan fixing at 7.2098 per dollar on Thursday (Jul 6), 360 pips stronger than the average estimate in a Bloomberg survey, marking the largest such gap since November. The fixing limits the onshore yuan’s moves by 2 per cent on either side.

The move came after a commentary in PBOC-backed Financial News said Beijing has ample tools to stabilise the currency market even if the yuan suffers “panic” selling. The PBOC pledged to curb speculation last month and used its daily reference rate to push back this week, though a dovish monetary policy that contrasts with rising global interest rates and weaker-than-expected growth are fuelling pressure on the currency.

Among China’s tools are the foreign-exchange risk-reserves ratio, banks’ FX deposit-reserve ratio, the countercyclical factor used in determining the PBOC’s daily reference rate for the yuan and the adjustment of macroprudential factors for cross-border financing, according to the report.

“The state media commentary is intended to shore up investor confidence on yuan exchange rate and the depreciation trend will remain in control given a basket of policy tools to stabilise yuan if necessary,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank in Hong Kong. “The strengthened fix indicates that the PBOC is still in alert mode to defend the currency.”

The yuan dropped towards a seven-month low on Wednesday after a private-sector gauge of China’s service activities fell more than expected. The Chinese currency has been slumping in recent months as a post-Covid economic recovery faltered and the monetary policy divergence between the world’s top two economies widened.

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China’s FX market stable, cross-border flows basically balanced: state media

Yuan depreciation since mid-May has been due to short-term factors related to China’s economic recovery not meeting expectations in the market, the report said. Still, the PBOC-backed newspaper said that there’s a basis for stabilisation in the yuan – and even appreciation – such as a sound overall trend for the economic recovery, along with policy support.

Expectations in China’s foreign-exchange market remain stable, while cross-border flows remain basically balanced, the commentary said. It also described China’s yuan market as resilient. BLOOMBERG