China props up falling yuan and warns speculators

China’s central bank has reportedly asked major state-owned banks to be prepared to sell dollars for yuan offshore markets, in an effort to put a floor under the falling Chinese currency.

State banks were told to ask their overseas branches to take stock of their holdings of the internationally traded yuan and prepare U.S. dollar reserves in case they need to be deployed, Reuters reported.

• The People’s Bank of China (PBoC) has so far refrained from using significant foreign exchange reserves, opting instead to use other roundabout measures to prop up the yuan’s months-long steady decline.

Yesterday, China’s yuan became the latest major currency to sink to fresh lows against a strong U.S. dollar, which has continued to rise in value after an aggressive bout of monetary tightening by the Federal Reserve. While Beijing has been easing interest rates to reinvigorate its COVID-strapped economy, Washington is hawkishly veering in the opposite direction to temper rising inflation.

• The offshore yuan (internationally traded) fell 0.9% to its lowest level of 7.2416 per dollar since data first became available in 2011, per the Financial Times (FT).
• The onshore yuan (domestic currency) also reached its weakest point since the global financial crisis in 2008, falling 0.7% to 7.2268 per dollar, per the same FT report.

China’s central bank warned against speculating on the yuan amid concerns about domestic sentiment and potential capital outflows: “Do not bet on one-way appreciation or depreciation of the yuan: In the long term, you will lose,” the PBoC said in a strongly worded statement (in Chinese).

• China’s central bank also said on Wednesday that maintaining the yuan’s stability is the “first priority,” while state-run financial newspaper Securities Times issued a front-page commentary on “restrained” losses compared with other currencies.
• “Set in context of other Asian currencies, the yuan’s slide against the dollar this year is fairly average,” Tom Hancock, a senior reporter on China’s economy at Bloomberg, wrote on Twitter.
• “I don’t think the current depreciation is driven by specific domestic [issues] in China,” Ken Cheung, a chief Asian FX strategist at Mizuho, told the FT. “It’s basically driven by the strength of the U.S. dollar.”

The yuan’s fall may complicate Beijing’s monetary easing this year: China has bucked a global tightening trend with things like major stimulus packages in a bid to boost the world’s second-largest economy, which the World Bank has now predicted will grow slower than the rest of Asia for the first time in 30 years.