China Ramps Up Yuan Support With Fixing, Borrowing Measure Tweak

The yuan jumped after China stepped up its support for the managed currency with a stronger-than-expected reference rate and a change to its capital curbs to lure inflows.

(Bloomberg) — The yuan jumped after China stepped up its support for the managed currency with a stronger-than-expected reference rate and a change to its capital curbs to lure inflows.

The People’s Bank of China set its daily fixing at just under 7.15 per dollar, 680 pips stronger than the average estimate in a Bloomberg survey and the largest bias since November. It also adjusted some rules to allow companies borrow more from overseas, opening up the door for more foreign capital inflows. 

The offshore yuan surged as much as 0.8% to just below 7.18, while the onshore rate jumped by a similar magnitude. The PBOC’s reference rate limits the onshore currency’s moves by 2% on either side.

The steps to support the currency comes amid a ramp up in rhetoric from Beijing to bolster business confidence as economic growth wanes. China’s Communist Party and government issued a joint pledge to improve conditions for private businesses, in a statement Wednesday.

China Vows to Boost Private Economy, Protect Businesses 

The yuan, which slumped more than 5% against the greenback last quarter, is under pressure from growth concerns as well as China’s widening monetary policy divergence with the US. The PBOC has been signaling its discomfort with the weakness by setting the fixing at stronger-than-expected levels since late June.

“The rise in dollar-yuan yesterday was worrisome for the PBOC, so it had to act more forcefully today,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets. “Direct intervention by authorities is still unlikely, but there are certainly other measures that could be done, such as a cut to the FX holdings reserve ratio of banks. We can expect more of these sizable fix deviations in the near future.”

The PBOC also adjusted its rules to allow firms borrow more from overseas. It raised the so-called macro-prudential parameter for companies and financial institutions cross-border funding to 1.5 from 1.25, according to a statement from the central bank. 

China made a similar move in October to aid the yuan, when it was plunging to fresh 2008 lows against the dollar. 

Stock market sentiment briefly benefited from the broad show of support. A gauge of Chinese stocks listed in Hong Kong snapped a two-day decline, before paring gains.

Whether the measures will support the yuan in the longer term is a matter for debate. There’s still no signs that Beijing will announce a stimulus package to boost the fragile economy and the Federal Reserve is expected to hike rates one more time next week, potentially boosting the dollar. 

“Today’s fixing underscores policymaker’s determination to push back against yuan weakening, especially following the rather sharp move in recent days,” said Christopher Wong, FX strategist at OCBC in Singapore. “But clearly such a move is only a short-term push back and markets will chase dollar-yuan higher again if disappointment over an absence of stimulus grows.”

The PBOC has plenty of other tools in its arsenal if the weakness continues. On top of the fixing, the central bank could get large lenders sell the dollar in afternoon trading, boost liquidity of foreign currencies in the onshore market and increase the cost of shorting the yuan with forwards.

“At the end of the day, there are still factors weighing on the yuan such as the US-China rate gap, weak fundamentals and so on,” said Eddie Cheung, senior emerging markets strategist at Credit Agricole CIB Hong Kong Branch. “The weaker dollar is working in their favor at the moment, and we are awaiting more news about the policy package which can help improve yuan sentiment once it’s finally released.”

–With assistance from Wenjin Lv, Tania Chen and Chester Yung.

(Updates levels.)

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