China Steps Up Efforts To Stabilize Yuan

China stepped up efforts to curb bets against its currency and reassure skeptical investors, as its central bank set another firm fix for the yuan on Tuesday backed by what dealers said was aggressive yuan buying offshore.

Ebbing confidence in China’s policymaking has fueled investors’ retreat from the slowing economy, and expectations that the currency will fall further has widened the gap between the tightly managed onshore yuan and the Hong Kong-based offshore rate.

The yuan has depreciated more than one percent since the start of the year, having lost 4.7 percent against the dollar last year, and the accelerated slide had raised uncertainty over China’s intentions regarding the exchange rate.

Analysts said offshore buying by state-owned banks, under the direction of the People’s Bank of China (PBOC), dried up yuan liquidity to such an extent that overnight yuan borrowing rates in Hong Kong (HIBOR) hit a record 66.8 percent.

As a consequence the spread between onshore and offshore yuan exchange rates briefly evaporated, having stood at more than 2 percent last week.

“The strength of its (the PBOC’s) actions appears to have reached the ‘nuclear-weapon’ level, and is comparable to that of the steps taken by other central banks when they previously fought against international speculators, such as George Soros,” said a senior dealer at a European bank in Shanghai.

Perceived missteps by the authorities have stoked concerns in global markets that Beijing might be losing its grip on economic policy, just as the country looks set to post its slowest growth in 25 years.

China’s equity markets, which tumbled 10 percent last week and a further 5 percent on Monday, remained volatile, swinging from black to red and back again. The Shanghai Composite Index .SSEC rose 0.2 percent and the CSI300 index .CSI300 closed 0.7 percent higher.

China’s central bank manages the currency by setting a daily target for the yuan, which is allowed to trade within a 2-percentage point band either side.

Reuters

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell