China seeks sentiment boost with strong yuan fix, cash injection
THE People’s Bank of China (PBOC) moved to boost fragile market sentiment with a stronger-than-expected reference rate for the yuan and the largest injection of short-term cash to the financial system since February.
The central bank injected 297 billion yuan (S$55.3 billion) of short-term liquidity on Wednesday (Aug 16). That came right after it offered the most forceful guidance to the market since October via its daily fixing for the managed currency.
Confidence in China’s financial markets is worsening by the day, as a slew of economic data from retail sales to fixed-asset investment point to a sluggish recovery. The onshore yuan is falling towards its weakest in 16 years against the US dollar and the MSCI China Index of stocks is poised to erase gains seen since a key policy meeting in late July that had stoked hopes for more stimulus.
Even an unexpected interest-rate cut by the PBOC on Tuesday failed to restore confidence and market moves suggest traders are looking for more aggressive supportive measures. What the country needs is more fiscal stimulus and further monetary loosening such as a cut to banks’ reserve requirements, according to analysts.
The PBOC is tasked with keeping the currency stable while aiming to boost the economy – two ambitions that can often be in conflict. A weak yuan may dampen the appeal of China’s assets to overseas investors, while Chinese firms may be reluctant to convert foreign currencies into yuan given the yawning yield differential between China and markets like the US.
“It is hard to boost the economy easily or the cost is very high,” Becky Liu, head of China macro strategy at Standard Chartered Bank said, citing a slew of issues including weak demand and the fragile property sector. “Aside from helicopter money, nothing seems to be very effective so more aggressive actions will be needed to avert this downward momentum.”
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Bearish sentiment towards the yuan has intensified in the options market, with one-month dollar-yuan implied volatility offshore hovering around the highest since April. The onshore yuan also traded within 0.5 per cent of the weak end of its 2 per cent trading limit defined by the daily reference rate on Tuesday.
These are further signs that if additional policy action to support the yuan aren’t delivered quickly, bearish wagers may grow.
Some Chinese state-owned banks were seen selling US dollars in both onshore and offshore markets, according to three traders, who asked not to be identified as they weren’t authorised to speak publicly. The size of the selloff was not significant onshore, one of them said.
Other tools in reserve include injecting dollar liquidity or adding punitive costs to those shorting yuan in forward markets. BLOOMBERG
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