Chinese foreign-exchange regulators reiterated their pledge to defend the yuan as the currency comes under renewed pressure amid the prospects of U.S. trade tariffs.
At a recent meeting, officials at The People's Bank of China and the State Administration of Foreign Exchange said they aim to stabilize the yuan exchange rate at a reasonable, balanced level. They emphasized their determination to penalize any actions that disturb market order and mitigate the risk of overshooting, a statement released Monday showed.
The Chinese currency has been weakening against the dollar since December, hovering around 16-months low ahead of the upcoming inauguration of President-elect Donald Trump, who has proposed significant tariffs of up to 60% on Chinese imports.
The yuan's fall also comes as China's long-term bond yields continuously touch fresh record lows, with investors rushing to haven assets amid economic uncertainty. The 10-year Chinese government bond yield dropped to an unprecedented 1.6% recently earlier this month, widening the yield gap between China and the U.S. to 300 basis points and further weighing the yuan.
That's prompted regulators to act, with China's central bank halting Chinese government bond purchases in open markets starting this month. The PBOC last week also announced plans to sell a record amount of central bank bills in Hong Kong this month to drain offshore yuan liquidity in the global financial hub and make it harder to short the currency. It has also been setting a strong daily reference rate to help regulate fluctuations in the yuan.
This "buying time" strategy could come at a cost, said OCBC's head of Asia macro research Tommy Xie Dongming and Greater China economist Keung Ching.
"The widening yield differential between the USD and CNY could encourage more dollar hoarding as investors and corporates seek higher yields," they said in a note. Success will hinge on economic fundamentals. with a clear reflationary trend and improved growth prospects offering key support for the yuan.
Also on Monday, PBOC Gov. Pan Gongsheng told the Asia Financial Forum in Hong Kong that "China has the confidence, conditions and ability to maintain stable operation of the foreign exchange market," state media reported.
"China will keep the yuan exchange rate basically stable at reasonable and balanced levels," Pan was quoted as saying.
Separately on Monday, the PBOC made it easier for domestic firms to raise money from overseas, a move that would increase onshore USD liquidity and relieve yuan depreciation pressure. The macro-prudential parameter for cross-border funding by companies and financial institutions was raised to 1.75 from 1.5, effectively raising the upper limit of the amount of overseas financing for firms, an official statement showed.
While pressure on the currency is unlikely to abate soon, Capital Economics says the PBOC has plenty of resources at its disposal.
The central bank could scale up sales from its multi-trillion dollar FX reserves, or deploy so-called "shadow" reserves, China economist Leah Fahy and others said in a report. Balance of payments data suggests Chinese holdings of foreign portfolio assets worth about $1.2 trillion, held mostly by commercial and policy banks, which the PBOC can instruct to sell to defend the yuan.
The economists think the PBOC will use that firepower to slow depreciation, but note that intervention can come at a price.
Yuan depreciation cushioned against the tariffs blow under the first Trump administration. Aggressive intervention now could hurt China's exports under Trump 2.0, where much bigger tariffs loom, the Capital Economics economists said. On the other hand, letting the yuan weaken too much "would be politically fraught domestically and also result in push-back from China's trading partners."
Write to Singapore editors at singaporeeditors@dowjones.com
(END) Dow Jones Newswires
01-12-25 2303ET