MNI BRIEF: PBOC Faces Test As Yuan Breaks 7.2

The People's Bank of China is expected to step up efforts to curb the weakening yuan as it broke through 7.2 against the U.S dollar, even as a hike in the forex risk reserve requirement takes effect today and as reports claim the Bank is set to reintroduce its counter-cyclical factor.

The yuan fell to its weakest since the 2008 financial crisis, with both CNY and CNH falling 400 pips to 7.2292 and 7.2224 respectively. The PBOC set its yuan daily fixing at 7.1107 on Wednesday, the highest since early June 2020, and the 25th consecutive higher-than-expected daily fixing, according to a Bloomberg survey.

The central bank is expected to take quicker and stronger actions to control the rapid depreciation, including the reintroduction of its counter-cyclical factor, further adjustments of forex RRR and forex risk RRR, and controls on forex swap transactions, analysts predicted. (see: MNI: PBOC Response May Be Needed As Yuan Breaches 7 - Analysts)

However, analysts said it is still too early for the PBOC to step in directly by spending its forex reserves to shore up the currency. In 2017, Yi Gang, then vice governor of the PBOC, said China spent about USD1 trillion of its forex reserve in 2015-2016 to prevent the “excess depreciation of the yuan”.