China extends fight against weak yuan as drops unsettle PBOC

CHINA took a further step to slow the slide in the yuan, setting its daily reference rate for the managed currency at a stronger-than-expected level for a second day.

The People’s Bank of China (PBOC) stepped up its support for the yuan with its so-called fixing, setting the rate 111 pips stronger than the average estimate in a Bloomberg survey – the largest premium since November. The onshore yuan climbed as much as 0.5 per cent after the move.

The currency had suffered its biggest decline in nearly five months on Monday (Jun 26) – a drop of about 1 per cent – as sentiment soured towards the country’s growth prospects. The lack of more aggressive stimulus from the authorities and China’s widening policy divergence from its peers in developed nations have also been weighed.

Investors will watch to see if the rebound can be sustained and the central bank could still dust off its old playbook of currency support if depreciation resumes. Last year, Beijing adopted measures such as cutting the reserve requirement ratio for foreign-currency deposits and increasing the cost for traders looking to short the yuan.

“The fixing is a strong signal that PBOC does not like the recent excessive, one-side move especially from 7.20 to 7.25 so quickly,” said Christopher Wong, an FX strategist at Oversea-Chinese Banking in Singapore. “Any intervention probably only slows the pace of yuan depreciation and 7.25 probably will be seen as the first line in the sand for now.”

Some state-owned banks and other participants mostly sold dollars after the market open on Tuesday, according to traders who asked not to be identified. Some dollar bulls also chose to take profit after the PBOC fixing, they said.

Late on Monday, state-owned banks were seen selling dollars to shore up the yuan’s offshore closing price, which was factored into Tuesday’s reference rate. The fixing itself limits the onshore yuan’s moves by 2 per cent on either side.

Pressure on the yuan will gradually ease as the economy improves due to pro-growth measures, state-owned newspaper China Securities Journal said in a report on Tuesday. It will then revert to a normal state of two-way moves, it said.

In May, China’s foreign-exchange regulator vowed it would “strengthen the guidance of market expectations and take actions to correct pro-cyclical and one-way market behaviours when necessary”.

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The onshore yuan gained 0.3 per cent to 7.2223 as of 10.16 am in Shanghai, while the offshore yuan was up 0.2 per cent. The shift in sentiment also helped boost stocks in Hong Kong and push China-linked assets like the Australian dollar higher.

“We believe the main interest of the PBOC is to maintain low interest environment in the onshore market, which is not compatible with a stronger yuan,” said Kiyong Seong, a strategist at Societe Generale. “The PBOC is likely to set the fixing stronger than the consensus on a sporadic basis. I don’t believe it will be a game changer though.” BLOOMBERG