## China’s Central Bank Takes Action Against Yuan Depreciation
China’s central bank has allegedly asked some of the country’s largest lenders to pause squaring their foreign exchange positions in the market. This is an attempt to alleviate downward pressure on the yuan, according to two sources familiar with the matter.
Under this informal “window guidance,” banks have been instructed not to square their positions in the inter-bank foreign exchange markets after selling U.S. dollars to clients. This is to continue until their spot foreign exchange position hits a predefined level.
Most banks are permitted to maintain either a net short or long foreign currency position in spot dollar-yuan markets, within set limits.
## Effects of the New Directive
The new directive implies that banks will absorb some of the heavy dollar purchases by companies and keep them on their books, thereby reducing the downward pressure on the yuan, which has been slipping recently.
The instruction came from a meeting the People’s Bank of China (PBOC) held with a few commercial banks earlier this week. At the meeting, banks were informed that companies needing to purchase $50 million or more would need to seek the central bank’s approval, as reported by Reuters.
## Yuan’s Decline and PBOC’s Response
This year, China’s yuan has lost more than 5% against the dollar, trading at 7.2735 per dollar on Thursday, making it one of Asia’s worst-performing currencies for 2023.
In the wake of this, the PBOC has been making efforts ahead of China’s golden week holidays in early October, which traditionally see a surge in overseas travel and dollar demand. According to sources, banks were also advised to encourage their clients to postpone dollar purchases.
## Other Factors Affecting the Yuan
The yuan has been under additional pressure due to the widening yield differentials with other major economies, especially the United States, and a faltering domestic economic recovery. The steady decline of the yuan has also resulted in exporters retaining their dollar earnings in deposits instead of converting them into yuan, or renminbi, as it is known locally in China.
## Overshoot
Earlier this week, China’s foreign exchange self-regulatory body pledged to take action when needed to correct one-sided and pro-cyclical activities and fend off risks of the yuan overshooting, according to a statement published by the PBOC.
In recent months, China has increased efforts to slow the pace of yuan declines by setting persistently stronger-than-expected midpoint fixings. It also announced that it would increase the dollar supply by reducing the amount of foreign exchange that banks must set aside.
Chinese authorities “are simply smoothening the cycle. They want to avoid herding behaviour. They want to avoid a scenario where the market feels that they might be losing control. And so they’re just using different administrative tools to smoothen price action,” said Sid Mathur, head of Asia-Pacific macro strategy and emerging market research at BNP Paribas.
Original Story at www.reuters.com – 2023-09-14 06:09:54
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