HONG KONG • China stepped in to try to cushion the yuan after a record string of weekly losses saw the currency closing in on the key milestone of 7 per dollar.
The People’s Bank of China (PBoC) will impose a reserve requirement of 20% on some trading of foreign-exchange (forex) forward contracts, according to a statement last Friday evening.
That will effectively make it more expensive to short the yuan, and is a tactic that the central bank used to stabilise the currency in the aftermath of its shock devaluation in 2015.
The change is aimed at preventing macro financial risks as the forex market shows signs of volatility amid recent trade frictions, and shouldn’t be interpreted as a capital control, according to PBoC.
The yuan surged in offshore trading and US stock-index futures turned higher after the news, though the moves pared after China detailed how it plans to retaliate against US tariff proposals.
While a weaker yuan benefits the exporters that are being walloped by tariffs, analysts had identified the level of 7 per dollar as a point where officials may seek to arrest declines, to counteract the mounting risk of capital outflows.
China burned through foreign reserves propping up its currency after the devaluation almost three years ago spurred a rush to take money out of the country.
“This move shows PBoC is getting increasingly concerned with the yuan’s depreciation, which has been too quick and could lead to a chain reaction, triggering capital flight,” said Xia Le, Banco Bilbao Vizcaya Argentaria SA’s chief Asia economist in Hong Kong.
“PBoC will use more measures to reverse the market’s overly bearish expectations on the yuan.”
Xia said he expects the yuan will remain basically stable against a basket of currencies in the near term, though “its long-term fate hinges on the trade war”.
The yuan is one of the world’s worst performers against the dollar in the past three months, slumping 7% on the trade frictions, local easing measures, and concern about a slowing economy.
The onshore currency tumbled as low as 6.8965 per dollar last Friday before suddenly paring the move ahead of the official close, when traders said they saw at least one large bank aggressively selling dollars.
The offshore yuan reversed losses after the PBoC statement, climbing 0.53% to 6.8451.
“Investors are focusing on two trades — shorting the yuan and China’s rates — and they will keep pushing the yuan weaker until PBoC steps in to intervene heavily,” said Zhou Hao, senior emerging market economist at Commerzbank AG in Singapore, last Friday before the PBoC announcement.
“If the yuan breaches 7 per dollar, the currency will likely tumble much faster and send shock waves across markets, hurting stocks as well.”
The Asian nation’s equity market, one of the worst performing globally this year, has now lost its place as the world’s second-biggest to Japan, data compiled by Bloomberg show.
China introduced a 20% reserve requirement on forwards as yuan volatility exploded after the 2015 devaluation, and removed it in September 2017.
There are signs of momentum- chasing moves in the forex market that may lead to herd behaviour, due to reasons including trade frictions and moves in other global currencies, PBoC said in a follow-up question-and-answer last Friday.
The imposition of reserve requirements is “obviously not a form of capital control”, because it doesn’t limit the volume of contracts that companies can use and deal-by-deal approvals are not required for such transactions, PBoC said.
The measure is part of the macroprudential policy framework, and is transparent, the central bank said.
“This means PBoC has shifted its forex policy to stabilising depreciation risk from staying neutral,” said Ken Cheung, a currency strategist at Mizuho Bank Ltd.
“It shows PBoC is aware of capital outflow pressures brought by depreciation. It will support the yuan.”