China Escalates Defense of Yuan, Pushes Currency Away From 16-Year Low

Introduction

In a strong verbal warning, China has escalated its defense of the yuan and pushed the managed currency away from a 16-year low. This move comes after forceful guidance with its daily reference rate.

Financial Regulators’ Action

• The People’s Bank of China (PBOC) stated that the nation’s financial regulators will take action whenever necessary to correct one-sided moves in the market.
• The PBOC is confident in keeping the yuan basically stable.

Stronger-Than-Expected Daily Fixing

China’s policymakers set a daily fixing that was stronger-than-expected by a record margin.

Active Selling of Dollars

State-owned lenders in China were seen actively selling dollars.

Credit Expansion in August

China reported that credit expanded more than expected in August, as lenders boosted loans and the government accelerated the sale of bonds.

PBOC’s Statement

• The PBOC urged participants of the foreign-exchange market to voluntarily maintain a stable market.
• They should avoid conducting speculative trades and behaviors that disturb market orders.

Yuan’s Rebound

The onshore yuan jumped about 1%, the most since March, to around 7.27 per dollar.

Impact on Market Fears

Eddie Cheung, senior emerging markets strategist at Credit Agricole CIB in Hong Kong, believes that the stronger fixing and weaker dollar should help ease fears of renewed yuan weakness.

State-Owned Banks Actions

State-owned banks were selling dollars during the morning session and continued to do so in the afternoon.

Some lenders began to unwind bullish dollar positions, triggering a wave of stop loss orders.

Reasons Behind Yuan’s Slump

China’s gloomy economic outlook, interest-rate divergence with the US, signs of easing factory deflation in August, positive press report on credit growth, and a rally in the yen may have contributed to the yuan’s slump.

Central Bank’s Efforts

Despite the PBOC’s efforts to support the yuan, many strategists believe that the central bank will only aim to slow the pace of declines and is unlikely to take drastic action to reverse the weakening trend.

Expert Opinion

Zhou Hao, chief economist at Guotai Junan in Hong Kong, believes that if the yuan continues to depreciate, the central bank will have to take more action.

Conclusion

China’s defense of the yuan has pushed the currency away from a 16-year low. The PBOC and state-owned lenders have taken action to stabilize the market and boost the yuan’s value. However, the central bank’s efforts may be limited to slowing the pace of declines rather than reversing the weakening trend.