China’s PBOC Dials Back Support for Yuan as Currency Steadies

August 21, 2024

2 minutes read

(Bloomberg) — China set its daily reference rate for the yuan broadly in line with expectations for the first time in more than a year, signaling its comfort with the currency’s current level following a rebound.

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The People’s Bank of China set the so-called fixing at 7.1307 per dollar on Wednesday, just seven pips away from the estimates in a Bloomberg survey of analysts and and traders. The gap was the smallest since June 2023.

The yuan has erased much of the year’s losses against the dollar in recent weeks as the latter retreated amid expectations of Federal Reserve rate cuts next month. Unwinding of a crowded strategy that involved borrowing the yuan cheaply and selling it against a higher-yielding currency has also helped.

The move signals reluctance of letting the yuan strengthen too much, said Becky Liu, head of China macro strategy at Standard Chartered Bank. “We currently see dollar-yuan at 7.10-7 by year end,” she said.

China had been preventing the yuan from sliding rapidly for most of the past year with the so-called fixing, as its bleak economic prospects and a wide yield discount to the US weighed on the currency. Dollar sales by state banks were also instrumental in supporting the exchange rate.

However, the PBOC started gradually weakening the fixing a few months ago amid calls from former officials to relax its control in order to open room for more easing. A weak yuan had been an impediment for further central bank stimulus as lower yields in China would further diminish the appeal of local assets versus those in other nations.

The need for further support for the economy has intensified amid few signs of growth rebound. Data last week showed China’s fixed-asset investment unexpectedly slowed to 3.6% in the first seven months of the year and home prices last month plunged the most since 2015 on a year-over-year basis.

China’s foreign-exchange regulator was also said to be gauging the impact of a stronger yuan on the nation’s exporters. The country has been relying on exports to pull itself out of an economic slowdown and the questions from authorities may indicate caution over the yuan’s latest advance.

Carry Trades

Concern over a “sharper downward move on the back of sizable long-dollar positions at Chinese exporters could prompt further actions to tame the yuan’s appreciation,” said StanChart’s Liu. “I don’t think the carry trade positioning is very heavy now as most of those trades have been unwound.”

For Kiyong Seong, lead Asia macro strategist at Societe Generale SA in Hong Kong, muted swings in foreign-exchange is a necessity for carry trade. “Even though the global FX volatility has subsided a bit, the market players are unlikely to build up meaningful carry position including short yuan for a while,” Seong said.

The offshore yuan slipped 0.1% to 7.1270 per dollar on Wednesday, while the onshore rate was little changed. The fixing limits the moves of the domestically traded currency by 2% on either side.

–With assistance from Qizi Sun.

(Updates with background on yuan support measures in 5th paragraph. A previous version of the story corrected size and scope in second paragraph.)