Monday, July 22, 2024

China intervenes to stop the decline of the yuan and support confidence


  • State banks sell dollars for yuan – market sources
  • The yuan is rebounding, but is nearing its 2008 lows
  • JPMorgan says further yuan weakness is likely

SHANGHAI/BEIJING (Reuters) – China’s monetary authorities cracked down on a currency drop for the first time in nearly eight months on Tuesday, as the country’s state banks set a floor on the yuan even as officials pledged more stimulus. ailing economy.

The People’s Bank of China (PBOC) put up a stronger-than-expected trading range for the yuan and state banks sold dollars, market sources said, in the strongest sign yet. Authorities’ unease is growing with the yuan’s accelerating decline.

The yuan has fallen about 4% against the dollar in two months as weak consumer confidence and a slumping real estate market exhaust the momentum generated by the post-pandemic recovery. It rebounded about 0.4% on Tuesday, its best gain in nearly two weeks.

“There is a fatigue that the yuan’s weakness has reached the point where a weaker currency can affect confidence which in turn fuels a weaker currency, and there needs to be some kind of assurance that we don’t get caught up in this kind of situation,” said Moh Seong Sim, currency analyst at Singapore Bank.

“They’re sending more signals now that they’re uncomfortable…they want to slow down the weakening of the yuan.”

The push comes as investors are feeling the pinch on China, as data shows China’s vaunted recovery has faltered. However, a choppy recovery has stoked expectations about stimulus to help offset growth concerns, something mainland authorities have been more vocal about.

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Addressing the World Economic Forum summit in Tianjin, Chinese Premier Li Qiang said China would take steps to boost demand and revitalize markets, though he did not provide details.

Analysts said the People’s Bank of China’s (PBOC) guidance of the yuan’s moves could slow but probably not stop the decline, given the tough economic outlook. Wall Street bank JPMorgan said it remains “bearish” on the CNY and expected the central bank to intervene again to prevent an acceleration of the move.

China is not alone in worrying about its currency’s downward momentum, driven in large part by widening yield differentials with tight monetary regimes in other major economies.

Japan’s Finance Ministry also issued warnings this week about what it sees as a rapid one-sided decline in the yen, and Japanese yen diplomat Masato Kanda said he was “not ruling out any” options to halt the nearly 10% decline in the yen in a matter of weeks.

Yuan reform

On Monday, the yuan closed at a seven-month low of 7.2425 per dollar, but rose to 7.2058 on Tuesday.

The country’s banks were selling dollars to buy yuan in the offshore spot market, according to four people familiar with the trades, and this emerged as the currency approached the psychologically important 7.25 level for the dollar, two of the people said.

Banks were also active late Monday, according to two other traders, when they bid the yuan sharply into the inside close, affecting the official midpoint of the yuan at the central bank the next day.

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On Tuesday, the People’s Bank of China (PBOC) set the mid-range even flatter than expected, departing from forecast models by the most since May.

“7.25 remains a key threshold,” said one market source, adding that a break through the level could quickly send the yuan to lows last seen in 2022.

In November, the currency hit a 14-year low of 7.3280 per dollar, while the offshore yuan touched a record low of 7.3746.

All sources spoke on condition of anonymity because they are not authorized to talk about the trades publicly. UBS said in a note that its trading desk saw significant interest among banks in pre-market trades to buy dollars through currency swaps, and said there may have been efforts by authorities to neutralize the impact of their immediate intervention.

The country’s banks are also suspected of easing the yuan’s decline last month, albeit minimally.

A country’s banks usually act on behalf of a country’s central bank in the foreign exchange market, but they can also trade for themselves or their clients.

“What can really stabilize the Chinese currency is … maybe they need to stabilize growth expectations. That concern needs to be addressed,” Sim said.

Analysts said moves to halt the yuan’s decline were not as strong as they were last year, when regulators took measures to encourage capital inflows, but they could be enough to slow the selling.

However, both stimulus and efforts to set a floor for yields are needed, analysts say, to prevent the yuan from slipping further.

“We should consider the possibility of further easing in the future,” said Rob Carnell, ING’s regional head of research for Asia and the Pacific.

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“What we’ve seen is just the first iteration of rate cuts that we’re going to get,” Carnell said. “We’re going to get a lot of them over the next couple of months.”

“This should keep the yuan on the back foot.”

Additional reporting by The Newsroom in Shanghai and Beijing, Ankur Banerjee, Tom Westbrook and Ray Wei in Singapore; Mark Jones in London, Editing by Vidya Ranganathan, Kim Coghill, Jacqueline Wong and Ed Osmond

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