China’s central bank is now implementing subtle measures to prevent the currency from rising too rapidly, a shift from its year-long efforts to support the weakening yuan.
The yuan rose 1.3% against the dollar in August August, almost erasing losses incurred in the first half of the year. On Friday, it was on track for its fifth straight weekly gain, its longest winning streak in more than three years.
Although there has been no change in China’s domestic challenges, such as slowing the economy and capital flight, the yuan has been supported by expectations of interest rate cuts by the Federal Reserve, weakening the dollar, and a stronger Japanese yen.
Authorities in China are taking covert steps to mitigate any sudden appreciation of the yuan that could disrupt domestic financial markets and negatively affect exporters. These steps include conducting market surveys to assess pressures and easing some regulations on gold imports and yuan trading positions for some banks.
The People’s Bank of China (PBOC) is particularly cautious due to the accumulation of speculative short positions on the yuan during the steady decline of the currency since early 2023. Such positions can be disposed of in an unregulated manner in the event of rapid appreciation of the yuan. Analysts from Macquarie Group estimate that issuers and multinationals have raised more than $500 billion in foreign currency holdings since 2022.
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To gauge potential increases in yuan purchases, the SEC last week inquired about the rate of foreign exchange transfers from banks, according to two sources familiar with the matter. Liu Yang, general manager of the Capital Market Business Department of Qishchang Development Group, stressed the importance of foreign currency settlement, noting that exports are the main driver of the Chinese economy.
In a separate move, last year’s directive banning banks from holding yuan selling positions at the end of the trading day was relaxed for some banks. In addition, the People’s Bank of China (PBOC) has granted new gold import quotas, which are usually restricted when the yuan is at risk of yuan depreciation.
Although these measures are subtle, analysts interpret them as an attempt to manage volatility rather than prevent the yuan from appreciating. Market participants are now revising their forecast for the yuan. Bank of America Securities analysts expect the yuan to continue to weaken due to weak growth and the People’s Bank of China’s dovish stance, but revised their year-end forecast to 7.38 to the dollar from 7.45 previously expected. The yuan is currently trading at around 7.14 to the dollar.
Reuters contributed to this article.
This article was translated with the help of an artificial intelligence program after an editor’s review. For more details please refer to Banha Terms and Conditions
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