November 24, 2022
  • November 24, 2022

China’s silence over rapid yuan gains resonates markets

By on October 21, 2021 0

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SHANGHAI – As the Chinese yuan climbs rapidly to its six-year highs against the currencies of the country’s trading partners, the noticeable lack of concern and intervention by authorities is confusing investors.

Beijing has so far not intervened directly or verbally in the rally in the yuan since early September, which took it to 4-month highs and topped 6.4 per dollar this week. The head of the currency regulator, the State Administration of Foreign Exchange (SAFE), said on Wednesday that the authorities would keep the yuan stable.


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This silence, amid growing signs of weak economy that the People’s Bank of China (PBOC) is keeping its promise to let market forces dictate the yuan’s path.

A popular theory is that the currency has been left on its own as authorities focus on resetting rules and funding options for real estate, tech and a host of other sectors. The alternative is for the PBOC to wait for the Federal Reserve to begin its political tightening, which could reduce the flow of foreign money pushing the yuan up.

Either way, as the 24-currency trade-weighted yuan index broke the 100 mark on Wednesday, a level last seen when it launched in late 2015, market participants are desperately looking for some clarity.


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“Keeping the dollar-yuan stable may be the sweet spot at this point,” Maybank analysts said, noting that a stronger yuan is currently holding back the rise in the cost of scarce raw materials and energy. for importers from the continent.

The PBOC and SAFE did not immediately respond to requests for comment from Reuters.

Power shortages, a crackdown on the real estate sector and lockdowns linked to COVID-19 caused the world’s second-largest economy to decelerate sharply in the third quarter, but the central bank kept rates stable and tight control over supply in cash.

Tommy Xie, Greater China Research Officer at OCBC Bank, highlights the latest statements by PBOC Monetary Policy Officer Sun Guofeng on keeping monetary conditions balanced as a sign of what is going to happen. to arrive.


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“My feeling is that the central bank is now very confident and at ease. The risk of capital outflows is low, liquidity is relatively easy to control, ”Xie said.

In addition, the growing trade surplus, capital inflows and a glut of dollars in the banking system would keep the yuan firm, he said.


While the Chinese monetary authorities have tolerated relatively larger fluctuations in their currency over the past four years – their stable foreign exchange reserves attesting to this non-intervention stance – the currency is still tightly managed by the central bank.

In addition to verbal warnings about one-way currency bets, authorities sometimes changed reserve requirements, used their daily yuan benchmarks, or brought state banks into swap markets when the yuan appreciated. quickly.


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The trade-weighted index has mostly stayed in a 92-98 band since 2016, while foreign exchange reserves hover just above $ 3 trillion.

This CFETS index is up 5.75% year-to-date, mainly due to the yuan’s gains against the Japanese yen, the euro and the South Korean won as capital inflows into the Chinese bonds and stocks and exporters’ profits rose.

By comparison, the yuan strengthened about 2.2% against the dollar.

“A breach of 100 in the CFETS index should put pressure on Chinese exports,” said Ken Cheung, chief Asian currency strategist at Mizuho Bank in Hong Kong.

But, he noted that the expeditions have remained exceptionally robust.

“This explains why the central bank can tolerate the strength of the yuan. Plus, a weaker yuan at a time when Beijing and Washington are reviewing the Phase 1 trade deal could be sensitive, ”he said.


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Another reason the PBOC might resign itself to yuan moves, analysts say, is the glut of dollars in the banking system, accumulated over the past two years, as state banks and corporations put excess income into the bank. dollars and entries into deposits.

While the PBOC has remained on the sidelines, that stack of dollar deposits has risen and is just slightly below the record highs above $ 1,000 billion reached in June.

The latest evidence for this dollar surplus is the SAFE balance of payments report showing that China has made “other” overseas investments with a net worth of $ 265.3 billion over the years. first six months of the year, most of which were deposits and loans.

“We believe the dollar’s liquidity stuck on land is a major reason the yuan is pulling away from its fundamentals,” said Tao Chuan, chief macro analyst at Soochow Securities.

“The central bank has withdrawn from frequent foreign exchange interventions … a lack of foreign investment channels and the restrictions faced by domestic financial institutions have led to a significant accumulation of currencies, mainly in dollars, in the accounts of commercial banks. “

(Reporting from the Shanghai Newsroom Additional reporting by Tom Westbrook in Singapore Writing by Vidya Ranganathan Editing by Kim Coghill)



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