The Chinese yuan has seen sharp weakness against the US dollar in the past several weeks as the dollar strengthened and investors worried about economic growth in China.
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The yuan is down about 3% this month on the strength of the US dollar, according to Wind information. Prolonged Covid controls and concerns about Chinese economic growth also dampened sentiment on the yuan.
On Monday, the People’s Bank of China (PBOC) announced that it will cut deposits by one percentage point to 8%, effective May 15. The move reduces the amount of foreign currency that banks need to hold, in theory reducing the amount of weak pressure on the yuan.
“This move serves as a strong political signal [the] Maggie Wei and her team said in a report on Monday that the People’s Bank of China was uneasy about the rapid depreciation of the currency.
Analysts pointed out that in the past year, China’s central bank raised the same foreign exchange reserve ratio twice to slow the rapid strengthening of the yuan.
“Looking ahead, we expect this RRR cut to slow the decline of the Chinese yuan in the near term, although it will also depend on the broad trajectory of the US dollar and general sentiment toward Chinese growth,” the analysts said. “Uncertainty remains high as Shanghai faces a prolonged lockdown and new local Covid cases in Beijing.”
On Wednesday, the People’s Bank of China (PBOC) set the yuan’s midpoint at 6.5598 against the dollar, the weakest resolution since April 2021, according to FactSet data.
The US dollar has strengthened since Federal Reserve It embarked on a cycle of tightening monetary policy and raising interest rates. The US 10-year Treasury yield It rose to its highest level in three years, Erase the premium for 10-year Chinese government bonds he once held.
Shiling Xie, chief analyst at Stansberry China, said Tuesday that market moves related to the Federal Reserve have made US dollar-denominated assets relatively attractive to investors, while there is general concern about China’s economic policy stance. He expects the yuan to go a weak trajectory, but said the pace is likely to slow.
The Chinese yuan is traded both at home – on the mainland – and abroad, primarily in Hong Kong. The yuan could trade within 2% above or below the midpoint set daily by the People’s Bank of China (PBOC) based on recent market movement.
The offshore yuan breached a key psychological level of 6.60 yuan per dollar late Monday — the weakest since the fall of 2020, according to Wind data.
As of Wednesday afternoon, the offshore yuan was holding slightly stronger, near 6.58 against the dollar. The inland yuan was near 6.55 yuan against the US dollar.
Economists at Morgan Stanley expect the local yuan to trade around 6.48 against the US dollar by the end of June.
“Overall, we believe the People’s Bank of China (PBOC) will tolerate some regular weakness in the Chinese yuan, as long as it is driven by fundamentals,” the bank’s emerging market analysts said in a report on Monday. “But it can exceed the US dollar / Chinese yuan [the target] short term given market volatility.”
Major stock indexes in China and Shanghai fell on Monday, their worst day since February 3, 2020 — in the early days of the initial shock of the pandemic.
The capital, Beijing, began mass testing in its main business district on Monday, ordering people in a smaller hard-hit area to stay indoors.
Shanghai, the largest city in China, has They have been locked down for a long time For about a month with no clear expiration date in sight.
Despite the better-than-expected Q1 GDP report last week, Many investment banks have lowered their full-year GDP forecast for China In light of the latest virus outbreak and Covid controls.
Policymakers have expressed support for growth in recent weeks, but markets have remained more pessimistic.
“China’s policy response has been moderate and geared toward fiscal front-loading,” Citi analysts said in a report late last week. “It is clear that the authorities are not resorting to old ways of preparation to unleash indiscriminate pressure to stimulate the economy.”
Aside from cutting the forex deposit reserve, the central bank also cut the overall reserve requirement rate – the amount of cash banks need to hold – on Monday. But the 25 basis point cut was less than many analysts had expected.
Premier Li Keqiang said Monday at a meeting of the State Council, the top executive body, that the government should attach great importance to the economic impact of unpredictable domestic and foreign situations.
The People’s Bank of China (PBOC) said on Tuesday that it is aware of the recent volatility in financial markets and that it will increase support for the economy with prudent monetary policy. But the announcement did not boost market sentiment much.
Shares in mainland China rose on Wednesday, after a choppy day of trading the previous day, which saw major indexes close lower.
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