China’s support for the under-pressure yuan shows no sign of fading with the managed currency languishing on the cusp of a 16-year low.
(Bloomberg) — China’s support for the under-pressure yuan shows no sign of fading with the managed currency languishing on the cusp of a 16-year low.
The People’s Bank of China set its daily reference rate at a stronger-than-expected level for a 54th straight day on Thursday, the longest streak since Bloomberg started a survey in 2018. A selloff in the currency brought it perilously close to the weak end of its 2% trading band against the dollar this week.
Weighed by China’s increasingly gloomy economic outlook and policy divergence with the US, the onshore yuan has slumped toward levels last seen in 2007 even as authorities ramp up support measures to slow its decline. Skepticism remains whether tools like this so-called fixing or asking state banks to sell dollars are game changers in the absence of a less hawkish Federal Reserve or a pickup in the world’s second-largest economy.
And still to be answered is at what level China’s line in the sand lies for the yuan, where its potential benefit to the economy is outweighed by the risk of a destabilizing spiral of outflows.
“Allowing too much yuan weakness will risk competitive depreciation across Asia, spur capital outflows, and only provide small benefits to the export sector,” said Wei Liang Chang, macro strategist at DBS Bank. “We believe China will continue to lean against yuan depreciation, while allowing some adjustment if the dollar is to strengthen sharply.”
Amid broad strength in the greenback, the yuan has fallen close to 6% this year, though has fared better against other major currencies. A gauge of the Chinese currency versus a basket of its trading peers is down about 2%.
The onshore yuan edged lower Thursday, trading around the 7.32 per dollar level.
Some strategists argue China is unlikely to do anything too drastic to reverse the yuan’s weakening trend.
“Dollar-yuan holding stubbornly above 7.30 despite the big fix lower tells you the pressure is still higher,” said Jefferies’ Brad Bechtel. “PBOC is definitely going to try not to have some sort of big devaluation event as it ruins the idea of yuan stability, the yuan as a trade currency, potential reserve currency etc.”
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