Chinese cabinet announces measures to revive Covid-ravaged economy

Chinese yuan banknotes are seen in this illustration taken on February 10, 2020. Photo: Reuters


Chinese yuan banknotes are seen in this illustration taken on February 10, 2020. Photo: Reuters

With the Chinese yuan rapidly climbing to its highest level in six years against the currencies of the country’s trading partners, a noticeable lack of concern and intervention from the authorities has investors worried.

Beijing has so far not intervened directly or verbally on the yuan’s rise since early September, which has taken it to 4-month highs and over 6.4 to the dollar this week. The head of the currency regulator, the State Administration of Foreign Exchange (SAFE), said on Wednesday authorities would keep the yuan stable.

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That silence, amid growing signs of weakness in the economy, has analysts speculating that the People’s Bank of China (PBOC) is keeping its word by letting market forces dictate the path of the yuan.

A popular theory is that the currency has been sidelined as authorities focus on resetting rules and funding options for real estate, technology and a host of other sectors. The alternative is for the PBOC to wait for the Federal Reserve to start tightening policy, which could reduce the flow of foreign currencies pushing the yuan higher.

Either way, as the 24-currency trade-weighted yuan index surged above 100 on Wednesday, a level last seen when it launched in late 2015, market participants desperately need clarity.

“Keeping the dollar stable against the yuan might be the sweet spot at this point,” Maybank analysts said, while noting that a stronger yuan is dampening rising commodity and oil costs for the time being. energy for the continent’s importers.

The PBOC and SAFE did not immediately respond to Reuters requests for comment.

Power shortages, a property sector crackdown and COVID-19 shutdowns caused the world’s second-largest economy to decelerate sharply in the third quarter, but the central bank kept rates steady and tight control over electricity supplies. cash.

Head of Greater China Research at OCBC Bank Tommy Xie points to PBOC monetary policy chief Sun Guofeng’s latest statements on monetary conditions remaining balanced as a sign of what is to come. will happen.

“My feeling is that the central bank is now very confident and comfortable. The risk of capital outflow is low, liquidity is relatively easy to control,” Xie said.

Besides, the growing trade surplus, capital inflows and a glut of dollars in the banking system would keep the yuan firm, he said.


While China’s monetary authorities have tolerated relatively larger fluctuations in their currency over the past four years – their stable foreign exchange reserves attesting to this hands-off attitude – the currency is still tightly managed by the central bank.

In addition to verbal warnings about one-way bets on the currency, authorities have sometimes changed reserve requirements, used their daily yuan benchmarks, or brought state-owned banks into swap markets when the yuan has appreciated rapidly.

The trade-weighted index has remained mostly in a 92-98 range since 2016, while foreign exchange reserves hover just above $3 trillion.

This CFETS index has risen 5.75% so far this year, mainly due to the gains of the yuan against the Japanese yen, the euro and the South Korean won, capital inflows into bonds and Chinese stocks and exporters’ earnings have ballooned.

In comparison, the yuan strengthened by around 2.2% against the dollar.

“A break of 100 in the CFETS index should put pressure on Chinese exports,” said Ken Cheung, chief Asian currency strategist at Mizuho Bank in Hong Kong.

But, he noted that shipments remained exceptionally robust.

“That explains why the central bank can tolerate yuan strength. Also, a weaker yuan at a time when Beijing and Washington are reviewing the Phase 1 trade deal could be sensitive,” he said.

Another reason the PBOC may be resigned to yuan moves, analysts say, is the glut of dollars in the banking system, built up over the past two years as state-owned banks and corporations have invested excess income. in dollars and inflows into deposits.

While the PBOC has remained on the sidelines, this stack of dollar deposits has risen and is just slightly below peak levels above $1 trillion hit in June.

The latest evidence of this dollar surplus is SAFE’s balance of payments report showing that China has made “other” overseas investments worth a net $265.3 billion over the past few years. first six months of the year, most of which was made up of deposits and loans.

“We believe that dollar liquidity stuck ashore is a key reason why the yuan is detaching from its fundamentals,” said Tao Chuan, chief macro analyst at Soochow Securities.

“The central bank has abandoned frequent currency interventions…the lack of foreign investment channels and the restrictions faced by domestic financial institutions have led to the accumulation of a large amount of foreign currency, mainly in dollars, on commercial bank accounts”.

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