China Unveils New Measures to Stabilize Yuan Amid Economic Uncertainty
As the yuan continues to struggle, China has announced a series of measures to support its currency and improve capital flows. The move comes as the country faces a dominant dollar, sliding bond yields, and the threat of higher trade barriers under the incoming US presidency.
Boosting Foreign Exchange Reserves
The People’s Bank of China (PBOC) has raised the limits for offshore borrowings by companies, allowing more foreign exchange to flow in. Additionally, PBOC Governor Pan Gongsheng revealed plans to substantially increase the proportion of China’s foreign exchange reserves in Hong Kong, although details remain scarce. China’s foreign reserves currently stand at around $3.2 trillion, with the exact investment allocation unknown.
Currency Stability Remains a Priority
According to Lynn Song, chief economist for Greater China at ING, the PBOC’s actions indicate that currency stability remains a top priority, despite market speculation about intentional devaluation to offset tariffs. By increasing China’s foreign reserves, the central bank will have more ammunition to defend the currency if market conditions necessitate it.
Yuan Struggles Continue
The onshore yuan traded at 7.3318 per dollar on Monday, near a 16-month low of 7.3328 hit on Friday. The currency has lost over 3% to the dollar since the US election in early November, driven by concerns about Trump’s trade tariffs and their impact on the Chinese economy.
Juggling Act for the PBOC
The central bank faces a delicate balancing act as it seeks to revive economic growth by keeping cash conditions easy, while also controlling a runaway bond rally and stabilizing the currency amid political and economic uncertainty. Recent measures include suspending treasury bond purchases and planning to issue large amounts of bills in Hong Kong to prevent yields from falling too much and control yuan circulation offshore.
Hong Kong’s Role in Supporting the Yuan
Gary Ng, senior economist at Natixis, notes that Hong Kong plays a significant role in supporting the yuan through trading activities and potential investments, despite China’s onshore market having a larger pool of yuan deposits. The city’s higher turnover driven by FX swaps and spot transactions makes it an important venue for stabilizing the currency.
Export and Import Data Offers Mixed Signals
Monday’s data showed China’s exports gaining momentum in December, with imports also recovering. However, the export spike was partly driven by factories rushing inventory overseas ahead of increased trade risks under a Trump presidency.
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