According to experts, China’s central bank has made it clear that it wants to prevent the Chinese yuan from falling too much versus the dollar.
The People’s Bank of China declared on Monday that it will lower the minimum amount of foreign currency that banks must keep for the second time this year.
Theoretically, such actions would lessen the downward pressure on the yuan, which has fallen more than 8% against the US dollar this year, reaching two-year lows.
Chinese authorities frequently highlight the yuan’s position in relation to a currency basket, against which it has risen by 1% over the past three months.
Beijing’s most recent steps, however, demonstrate how crucial the yuan-dollar exchange rate still is, according to a study released on Monday by Ting Lu, the senior China economist at Nomura.
They provided two explanations:
- “First, in a year of the once-in-a-decade leadership reshuffle and with elevated US-China tensions, Chinese leaders especially care about RMB’s bilateral exchange rate with USD because they believe RMB/USD somehow reflects relative economic and political strength.”
- “Second, a big depreciation of RMB/USD could dent domestic sentiment and speed up capital flight.”
A new group of leaders will be chosen by China’s ruling Communist Party in October, thereby strengthening President Xi Jinping’s position of authority.
Over the past few years, tensions between the U.S. and China have risen, leading to tariffs and sanctions against Chinese IT firms.
As a result of the pandemic shock in 2020, China’s economic development has slowed during the past three years. Many experts have lowered their GDP projections to roughly 3% as a because of this year’s tighter COVID measures, which included a two-month closure of Shanghai.
The yuan has weakened as a result of the economic slowdown, which may help make Chinese products more affordable to customers in the United States and other nations.
The U.S. Federal Reserve aggressively tightened monetary policy this year, which led to a large increase in the value of the U.S. dollar.
The euro and the Japanese yen have also fallen to 20-year lows, which has helped the dollar as measured by the U.S. dollar index.
Levels to pay attention to
“We think the PBOC might have tolerance for further CNY depreciation against the USD, especially as the broad USD continues to strengthen, though they might want to avoid continued and too fast one-way depreciation if possible,” according to a research released on Monday by Maggie Wei, an analyst at Goldman Sachs.
The researchers predicted that during the next three months, the yuan will weaken to 7 versus the dollar. By the end of the year, the foreign exchange specialists at Nomura expect a level of 7.2.
Data from Wind Information show that between May 2020 and September 2019, the yuan last traded at 7.2 to the dollar.
“I don’t think it will go far beyond , certainly sort of beyond the 7.2 that we saw during the trade war,” in an interview with CNBC’s “Squawk Box Asia” on Tuesday, senior China economist Julian Evans-Pritchard remarked.
“I think that’s the key threshold,” he said. “I think the reason they’re reluctant to allow that to happen is, if it goes beyond that level, then expectations for the currency risk becoming unanchored. You risk seeing much larger-scale capital outflows.”
According to Wind Information, the PBOC fixed the midpoint of the yuan versus the dollar on Tuesday at 6.9096, which is the lowest value since August 25, 2020. The yuan is moderately controlled by China’s central bank, which bases its daily trading midpoint on current price levels.
PBOC: Avoid placing bets on certain issues
The next reduction in the PBOC’s foreign currency reserve ratio, from 8% to 6%, is scheduled to go into effect on September 15th, according to a statement posted on the website of the central bank on Monday.
Liu Guoqiang, deputy governor of the PBOC, stated earlier in the day that individuals “should not bet on a specific point” and that the currency should move in two directions in the short term.
That’s what the Chinese translation of a transcript of Liu’s comments at a press conference on economic policy says.
Liu continued to support Beijing’s long-term goals of increased yuan use abroad. “In the future the world’s recognition of the yuan will continue to increase,” he said.