PBOC Manages Yuan’s Decline With Strong Support Via Fixing

(Bloomberg) -- China’s support for the yuan Friday signaled its desire to manage its decline, as broad strength in the dollar kept the currency close to a policy no-go area.

The People’s Bank of China set its daily reference rate for the managed currency at 7.1196 per dollar. While the level was slightly weaker than Thursday’s, the difference between the so-called fixing and forecasts was the widest since April.

China Moves to Support Yuan Through Daily Fixing

China sets the so-called fixing at 9:15 a.m. local time, around which the currency is then permitted to trade in a 2% range.

Chinese state-owned banks also increased support for the currency. They sold dollars in the onshore market when the yuan edged lower to around 7.2605, according to traders who asked not to be identified as they are not allowed to speak publicly.

The yuan has fallen to its lowest since November and is close to the weak end of its trading band amid broad dollar strength and pessimism about the prospects for the Chinese economy. While Beijing has been allowing the currency to gradually decline, it’s wary of triggering a vicious cycle of capital outflows and further losses and favors stability over rapid declines.

“The PBOC is trying to hold the pricing power in its own hands,” said Le Xia, an economist at BBVA. “The PBOC is smoothing the overall process of weakening the yuan and deterring markets from betting against it.” The central bank’s guidance is aimed at preventing one-way weakness, he said.

The onshore yuan was little changed at 7.2610 per dollar, while its offshore peer gained 0.1% to 7.2862.

Here Are the Tools That China Uses to Manage the Yuan: QuickTake

Dollar Strength

The PBOC’s actions comes amid broad dollar strength with Bloomberg’s index of the US currency close to its highest this year driven by the Federal Reserve’s higher-for-longer interest rates.

The yuan’s weakness is symptomatic of deteriorating sentiment toward the world’s second-largest economy, which is also seeing a bond market rally as investors seek out haven assets. Benchmark yields have tumbled toward record lows amid mixed economic data and expectations of further stimulus.

PBOC Governor Pan Gongsheng said on Wednesday the momentum of the dollar is weakening, and that will help keep the yuan stable and expand room for China’s monetary policy.

“The PBOC is sending a signal that they want to continue its strong control over the yuan and prevent a steeper decline or speculative pressure from building against the yuan,” said Fiona Lim, senior currency strategist at Malayan Banking Bhd.

The fixing came as currency traders mulled a report from the US Treasury Department that kept China on its “monitoring list” for foreign-exchange practices and added Japan. It reiterated a call for greater transparency in how Beijing conducts its exchange-rate policy and flagged its trade surplus with the US.

It also cited “anomalies” in China’s current account data.

“Keeping the yuan from weakening too much may lower the risk of incurring the ire of the US officials, particularly at a time where China exports are experiencing a recovery,” Lim said. “However, defending the yuan also requires FX intervention which ironically, is a criteria to be labeled a currency manipulator.”

--With assistance from Ran Li.

(Adds context and comment on US currency report.)

Most Read from Bloomberg

©2024 Bloomberg L.P.