China Stands Firm on Yuan Support Amid Speculation
Defying Expectations
China’s central bank, the People’s Bank of China (PBOC), has reaffirmed its commitment to stabilizing the yuan, dispelling speculation that it would allow the currency to depreciate further. The PBOC set its daily reference rate stronger than the 7.2 per dollar mark, contradicting predictions of a weaker fixing.
Boosting Confidence
A PBOC-backed newspaper reported that central bank communication has shown a clearer resolve to stabilize the currency. Furthermore, Beijing plans to issue more bills in Hong Kong, which may absorb excess liquidity and support the yuan. This move is expected to quell bets on further declines, which were fueled by a widening yield gap with the US and concerns over China’s economic outlook.
Trade Frictions and Economic Uncertainty
The yuan has been under pressure due to escalating trade frictions and uncertainty surrounding President-elect Donald Trump’s second term. However, the PBOC’s pushback has sent a strong signal that it will defend the currency. According to Alex Loo, a macro strategist at TD Securities, “The PBOC has squashed doubts that it has dropped its support for the yuan.”
Managing Currency Trading
The PBOC has pledged to strengthen the management of currency trading and crack down on behavior that disrupts the market. The central bank aims to prevent one-sided bets and any overshoot in the exchange rate. State-owned banks have been selling dollars in the onshore market to meet demand, but they are not supporting the yuan at a fixed level.
Bearish Sentiment Persists
Despite the PBOC’s efforts, investors remain bearish on the currency. The onshore yuan is expected to weaken to 7.40 per dollar in three months and 7.50 in six-to-12 months, according to Goldman Sachs Group Inc. strategists. Other forecasters, such as BNP Paribas SA and Nomura, also predict a decline in the yuan’s value.
Economic Pressures
China’s sluggish economy, potential increase in US tariffs on Chinese exports, and signs of capital outflows are all weighing on the yuan. The country has already experienced the largest fund exodus on record from its financial markets in November.
PBOC’s Tools
In addition to the daily reference rate, the PBOC has other tools at its disposal to manage the currency, including mopping up yuan liquidity in offshore trading and direct intervention in the foreign-exchange market. According to Fiona Lim, a senior strategist at Malayan Banking Bhd., “Anchoring the yuan sentiment seems key at this point.”
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