How China talked markets out of a run on the yuan


SINGAPORE, Dec 30 (Reuters) – In recent months, China has sought to stabilise the yuan by orchestrating buying by state banks and giving market guidance to bankers.

The strategy of moral suasion marks a sharp break from Beijing’s approach the last time the currency was on the ropes, in 2015.

Back then, the People’s Bank of China (PBOC) resorted to official intervention as the central bank burned $1 trillion in reserves to shore it up.

In 2023, as China’s economy wobbled and money left the country, the PBOC took a starkly different approach, defending the currency by signalling to markets what kind of selling it would and would not tolerate.

Interviews with 28 market participants show at least two dozen cases where regulators closely and frequently steered market participants through a range of co-ordinated actions this year to resist strong downward pressure on the yuan.

The PBOC and State Administration of Foreign Exchange, the currency regulator, did not respond to Reuters’ faxed questions about its approach. PBOC governor Pan Gongsheng has previously said regulators would prevent exchange rate overshooting risks and maintain stable FX market operations.

The strategy market participants and analysts described to Reuters has prevented a destabilising yuan slide.

However, they told Reuters that it has also chilled large parts of China’s foreign exchange market, crashing trading volumes and raising questions about the yuan’s chances of becoming a global reserve currency.

“The circumstances … at the moment are considerably more complicated because there are both domestic as well as global macroeconomic factors,” said Eswar Prasad, Tolani senior professor of international trade policy at Cornell University.

He described the PBOC’s use of “non-standard measures to intervene in foreign exchange markets” as a form of “triage” to stop the yuan falling too rapidly.

As the currency of the world’s second-largest economy and biggest exporter, the yuan’s value determines the price of goods around the world and trillions of dollars in capital flows. It also serves as a barometer of China’s challenges.

A Chinese forex regulator, speaking on condition of anonymity, said the currency’s value was ultimately determined by fundamentals and currently a product of how “effectively China can thwart decoupling”, a reference to Western efforts to reduce economic reliance on China.

Ten traders interviewed by Reuters said key warnings first emerged in June when the PBOC’s daily yuan guidance that determines its trading range for the day, known as the midpoint, started to diverge from market expectations.

In theory, the midpoint is based on contributions from 14 banks and referenced to the previous day’s trade and overnight moves, which should make it easy for markets to predict.

By August, however, the midpoint’s yawning deviation from trader estimates was read by the traders interviewed by Reuters as a signal the PBOC did not want the currency to go where markets were pushing it.



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