Shortly after the yuan fell to 7.2458 to the dollar, the People’s Bank of China announced that currency stability is a priority. Like other currencies, the yuan has fallen 12% against the dollar.
The central bank warns currency speculators.
The Chinese yuan’s exchange rate against the dollar recently plunged to 7.2458 per dollar, the lowest level since January 2008. This drop in the yuan occurred just days after the exchange rate between the yuan and the U.S. dollar broke through the 1 to 7 mark. Since then (September 15, 2022), the RMB has now depreciated by more than 3%.
the Chinese yuan, like other world currencies, has struggled against the dollar since the U.S. Federal Reserve began raising interest rates modestly.
The rate hikes are a tool the Federal Reserve is using to tame the country’s inflation rate, which peaked at 9.1% in June 2022.
However, with the yuan slumping to its lowest exchange rate in more than 14 years, the People’s Bank of China (PBOC) has reportedly said that stabilizing the yuan will be a priority going forward.
In addition to reassuring the market, the PBOC also warned of the consequences that those betting against the yuan might face: the PBOC reportedly said, “The yuan will be stabilized in the near term, and we will continue to bet against it,”
Don’t bet on a one-way appreciation or depreciation of the yuan, because there will always be losses in the long run.
Instead of betting against the currency, the central bank urged players in the foreign exchange market to “voluntarily safeguard the stability of the market and stand firm when it is necessary to bring down the hammer on major appreciation or depreciation in the exchange rate.”
China’s Stealth Intervention
According to a BloombergreportChina’s central bank warning is directed at companies that allegedly made speculative bets against the yuan. The warning is also directed at financial institutions that are allegedly violating state policy.
Before the yuan fell on September 28, the People’s Bank of China reportedly indicated its intention to “dampen speculative demand” by imposing a risk reserve ratio (RRRR) of 20% on financial institutions that purchase foreign exchange in currency forwards. A South China Morning Post reportquoting a Goldman Sachs analyst
noted that the bank was hoping to slow the depreciation of the yuan by raising the RRRR ahead of the 20th Congress of the Chinese Communist Party.
Meanwhile, Grant Wilson, a senior advisor at macro advisory and data analysis firm Exante Data, argued in a recentop-edthat Chinese monetary authorities may have already taken steps to secretly help the yuan. But because of the covert intervention, “it appears on the Chinese state bank’s balance sheet only as net foreign currency assets, not as central bank reserves.”
Wilson argued that the Chinese authorities engage in such intervention in order to thereby curb the appreciation of the yuan while supporting exports. Fear of being labeled a currency manipulator may be another reason why Chinese monetary authorities have chosen to intervene in secret.
“The stability of official reserves means that China does not meet one of the three criteria the U.S. Treasury uses to label a country a currency manipulator,” Wilson explained.
Image Credit: Shutterstock, Pixabay, Wiki Commons.