MNI: PBOC To Seek To Close Gap Between Yuan Fixing And Market

The People’s Bank of China is likely to further squeeze offshore yuan liquidity as it defends the onshore rate at 7.3 to the dollar, and would take advantage of any broad weakness in the U.S. currency to drive the exchange rate closer to its daily fixing level, Beijing policy advisors and traders told MNI.

The gap between the PBOC’s daily parity price, set at about 7.20 since August, and the onshore CNY and offshore CNH rates rose as high as 1,305 pips on Sept. 5 and to 1,265 pips last Friday, when CNY dropped to its weakest level in 16 years, closing at 7.3415 to the dollar. The offshore CNH rate fell to 7.3682, approaching the 7.3748 level last seen in October.

While Chinese authorities technically allow CNY to trade 2% above or below the fixing each trading day, this is only a maximum deviation and an advisor specialising in foreign exchange policy said the PBOC regards the current persistent gap with market prices as unacceptable, hence this week’s barrage of currency support measures.

BARRAGE OF MEASURES

On Monday, the central bank set CNY fixing as much as 1,243pips stronger than the market’s estimate while state-owned banks sold dollars offshore, a Hong Kong-based trader told MNI. The PBOC also surprised the market by releasing strong monthly credit data earlier than usual, and the National Foreign Exchange Market Self-Regulation Mechanism stated it would “take actions when necessary” against the risk of any exchange rate overshoot.

Two days later the PBOC sold CNY15 billion in bills in Hong Kong to drain offshore liquidity, its second net issue within a month, prompting CNY to close at 7.2789 on Wednesday, up from Monday’s 7.30. The one-month yuan-denominated Hong Kong Interbank Offered Rate rose 36 basis points on Thursday morning, its biggest jump since October 2018, as offshore liquidity tightened.

The central bank is likely to issue more offshore bills and even use foreign exchange reserves to assist state-owned banks supporting the yuan, the advisor said. While recent economic indicators, such as PMI, trade and credit data, have been more positive, the PBOC regards sharp currency depreciation as bringing a risk of excessive capital outflows, which would undermine equity markets and economic recovery, the advisor said. (See MNI: PBOC Faces Tough Task To Defend Yuan, Advisors Say)

ROOM TO ACT

The yuan has weakened 2.13% against the dollar since the end of July, compared to the 3.3% decline in the euro, a 2.8% slide in sterling and a 4.3% depreciation by the yen over the same period. But now that a moderate response to Wednesday’s higher-than-expected U.S. inflation data has eased some immediate concerns about a rise in the dollar index above 105, the onshore yuan should hold at 7.3, and possibly strengthen faster than other currencies should the greenback begin to reverse, a Shanghai trader told MNI. (See MNI: Yuan Seen As High As 7.0 After PBOC, Politburo Moves)

The China Foreign Exchange Trade System index, which measures the yuan against major trading partners' currencies, has only fallen 0.91% this year, which may give the PBOC leeway to act should the dollar strengthen further, the trader added.

China’s foreign exchange reserves fell by USD44.2 billion in Aug to USD3.16 trillion, the biggest drop since February, according to the State Administration of Foreign Exchange.