The Peoples Bank of China stated that stabilizing the currency would be its priority after the Chinese Yuan’s offshore exchange rate against the U.S. dollar dropped to 7.2458 per $1. The yuan has lost 12% against the greenback this year, just like other currencies that have depreciated against the dollar.
Recently, the Chinese yuan’s offshore exchange rate against the dollar plunged to 7.2458 per dollar. This is the lowest level since January 2008. The latest slump in the yuan occurred days , just after both currencies crossed the 1:7 threshold. The yuan’s value has declined by more than 3% since September 15, 2022.
Since the beginning of the year, the Chinese Yuan has fallen by more than 12% against the U.S. Dollar. A Reuters report shows that the Chinese yuan has been struggling against the dollar since the U.S. Federal Reserve started marginally increasing interest rates.
Federal Reserve uses interest rate increases to control the country’s high inflation rate which hovered at 9.1% in June 2022.
The People’s Bank of China (PBOC), however, has reportedly stated that it will now prioritise stabilizing the yuan after the yuan’s collapse to its lowest exchange rate for more than 14 years.
The PBOC reassured markets and warned about the repercussions that would be suffered by anyone betting against the yuan. According to reports, the PBOC stated:
Don’t bet on the one-way appreciation and depreciation, as you will certainly suffer losses in the long term.
The central bank advised currency market players not to bet against the currency and urged them to “voluntarily safeguard stability of the markets, and to be firm when there are large rallies or falls in the exchange rate.
China’s stealth approach to normalise markets
According to a Bloomberg report the warning was issued by the Chinese central bank and is directed at corporations that are being accused of placing speculative wagers against the yuan. Financial institutions that are allegedly violating the country’s policies will also be warned.
The POBC had reportedly indicated its intent to “dampen speculation demand” by imposing an RRRR of 20% on foreign currency forwards purchases by financial institutions. According to a report published in the South China Morning Post that quotes Goldman Sachs analysts, the PBOC hoped that raising the RRRR would slow the yuan’s decline ahead of The Chinese Communist Party’s 20th Congress, the report suggests.
Grant Wilson, a senior advisor at Exante Data and macro advisory firm, said in a recent opinion that Chinese financial authorities might have secretly helped the yuan. The intervention was done by stealth and only appears on the balance sheet of China’s banks as net foreign currency assets rather than in the PBOC’s official reserves.
Wilson claimed that Chinese authorities have been intervening to limit the yuan’s appreciation and support exports. Another reason Chinese monetary authorities might have intervened secretly is the fear of being called currency manipulators.
Wilson explained that China’s stability in official reserves means that it does not meet any of the three criteria used to classify a country as a currency manipulator by the U.S Treasury.