China steps up policy measures to defend fragile yuan By Reuters
SHANGHAI (Reuters) – China on Monday stepped up policy measures to defend a weakening yuan, easing rules to allow more offshore lending and sending verbal warnings as the Chinese currency hovered around its lowest point since against a strong dollar 16 months fluctuated.
The yuan faced renewed depreciation pressure, weighed down by a triple pressure from a generally stronger U.S. dollar, falling Chinese yields and rising trade tensions with other economies.
The People’s Bank of China (PBOC) announced on Monday that it would raise borrowing limits to allow companies to take out more loans abroad.
The ratio under its macroprudential assessments (MPA), which sets the maximum amount a company can borrow relative to its net assets, would be raised from 1.5 to 1.75 with immediate effect.
The move was to “further improve the macroprudential management of cross-border financing, further increase the sources of cross-border funds for enterprises and financial institutions, and guide them in optimizing their asset-liability ratios,” the PBOC said in a joint statement with the foreign exchange regulator declaration made.
Separately, the China Foreign Exchange Committee planned to keep the yuan exchange rate fundamentally stable at a reasonable and balanced level, the central bank said in another statement.
The committee is a forum under the auspices of the Central Bank and the Foreign Exchange Regulatory Authority.
The committee also said that monetary authorities will increase the resilience of the foreign exchange market and strengthen market management. They will also correct pro-cyclical market activity, address behaviors that disrupt market order, and prevent the risk of exchange rate overshoot.
And in Hong Kong on the same day, PBOC Governor Pan Gongsheng said at the Asia Financial Forum: “China has the confidence, conditions and ability to maintain stable functioning of the foreign exchange market.”
“China will essentially keep the yuan exchange rate stable at a reasonable and balanced level,” Pan affirmed.
These measures “send a signal to stabilize the yuan,” said Ken Cheung, chief Asian FX strategist at Mizuho (NYSE:) Bank.
“But the actual impact on capital flows and exchange rate is relatively limited due to the low cost of domestic financing.”
Cheung said regulators will continue to primarily use daily midpoint fixing to stabilize the currency and manage market expectations.
China was trading at 7.3315 per dollar at 0247 GMT on Monday, not far from a 16-month low of 7.3328 hit on Friday. It has lost more than 3% against the dollar since US President-elect Donald Trump won the election in November.
Since mid-November, the central bank has set its official mean forecast on the firmer side of the key level of 7.2 and stronger than market forecasts. Traders and analysts widely interpreted this as a sign of increasing concern over the yuan’s recent decline.
The PBOC announced last week that it will sell 60 billion yuan worth of six-month yuan bills in Hong Kong on January 15. This is the highest value since the central bank began selling such notes in the financial center in 2018.
Selling these yuan bills depletes market liquidity to reduce speculative bets against the yuan.
