The Chinese yuan has tumbled to two-year lows towards the U.S. greenback in the previous few weeks.
Sopa Images | Lightrocket | Getty Images
BEIJING — China’s central financial institution has despatched a powerful sign it desires to maintain the Chinese yuan from weakening too shortly towards the U.S. greenback, economists mentioned.
For a second time this 12 months, the People’s Bank of China introduced Monday it will scale back the quantity of overseas foreign money banks want to carry.
Such strikes theoretically scale back the weakening stress on the yuan, which has tumbled by greater than 8% this 12 months to two-year lows towards the U.S. greenback.
Chinese authorities sometimes emphasize the yuan’s degree versus a basket of currencies, towards which the yuan has strengthened by about 1% during the last three months.
However, Beijing’s newest actions present how essential the yuan-dollar trade fee nonetheless is, Nomura’s chief China economist Ting Lu and a workforce mentioned in a report Monday.
They gave two causes:
- “First, in a year of the once-in-a-decade leadership reshuffle and with elevated US-China tensions, Chinese leaders especially care about RMB’s bilateral exchange rate with USD because they believe RMB/USD somehow reflects relative economic and political strength.
- “Second, a giant depreciation of RMB/USD might dent home sentiment and velocity up capital flight.”
China’s ruling Communist Party is set in October to select a new group of leaders, while solidifying President Xi Jinping’s power.
Tensions between the U.S. and China have escalated in the last several years, resulting in tariffs and sanctions on Chinese tech companies.
Meanwhile, China’s economic growth has slowed in the last three years, especially with the shock of the pandemic in 2020. Tighter Covid controls this year, including a two-month lockdown of Shanghai, have prompted many economists to cut their GDP forecasts to near 3%.
That economic slowdown has contributed to the weakening yuan, which can help make Chinese exports cheaper to buyers in the U.S. and other countries.
The U.S. dollar has strengthened significantly this year as the U.S. Federal Reserve aggressively tightened monetary policy.
In addition, the greenback — as measured by the U.S. dollar index — has benefited from 20-year lows in the euro and a similar plunge in the Japanese yen.
Levels to watch
“We suppose the PBOC may need tolerance for additional CNY depreciation towards the USD, particularly because the broad USD continues to strengthen, although they may need to keep away from continued and too quick one-way depreciation if potential,” Goldman Sachs analyst Maggie Wei and a team said in a report Monday.
The analysts said they expect the yuan to depreciate to 7 against the dollar over the next three months. Nomura’s foreign exchange analysts forecast a 7.2 level by the end of the year.
The yuan last traded near 7.2 against the dollar around May 2020 and September 2019, according to Wind Information data.
“I do not suppose it should go far past [7], actually kind of past the 7.2 that we noticed throughout the commerce battle,” Julian Evans-Pritchard, senior China economist at Capital Economics said Tuesday on CNBC’s “Squawk Box Asia.”
“I feel that is the important thing threshold,” he said. “I feel the explanation they’re reluctant to permit that to occur is, if it goes past that degree, then expectations for the foreign money danger turning into unanchored. You danger seeing a lot larger-scale capital outflows.”
The PBOC on Tuesday set the yuan’s midpoint against the dollar at 6.9096, the weakest since Aug. 25, 2020, according to Wind Information. China’s central bank loosely controls the yuan by setting its daily trading midpoint based on recent price levels.
PBOC: Don’t bet on a specific point
The PBOC’s latest cut to the foreign currency reserve ratio — to 6% from 8% — is set to take effect Sept. 15, according to an announcement Monday on the central bank’s website.
Earlier on Monday, PBOC Deputy Governor Liu Guoqiang said that in the short term, the currency should fluctuate in two directions and people “mustn’t wager on a selected level.”
That’s according to a CNBC translation of a Chinese transcript of Liu’s remarks at a press event on economic policy.
For the long run, Liu maintained Beijing’s hopes for greater international use of the yuan. “In the longer term the world’s recognition of the yuan will proceed to extend,” he mentioned.
— CNBC’s Abigail Ng contributed to this report.
Source: www.cnbc.com”