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The People's Bank of China
MNI (London)

The People's Bank of China could take further steps to deter any speculation-driven yuan rally if necessary, Chinese policy advisors and foreign exchange experts told MNI, though one noted that recent moves to curb currency strength had been enacted only after considerable internal debate among policy makers.

Reserve requirements for banks' foreign currency deposit which surged to a record USD1 trillion at the end of April, could be hiked further, according to Lian Ping, chief economist at Zhixin Investment Research Institute, speaking after the PBOC increased the ratio to 7% from 5% on Monday, ending a yuan surge which had sent it to a three-year high the week before. The PBOC will wish to avoid forex inflows fueling base money creation at a time when inflation is picking up, he said, though he added that, should price pressures cool, the PBOC could loosen policy to boost yuan liquidity.

USDCNY should fluctuate between 6.2-6.6 to the dollar during 2021 with a mid-point of 6.4, boosted by a strong post-Covid recovery, trade surplus and capital inflows as well as a wide China-U.S. rates spread, said Lian, a former chief economist at the Bank of Communication, one of the big five state-owned banks, adding that possible Federal Reserve tapering combined with U.S. fiscal stimulus could drive a fourth-quarter dollar rally. The PBOC will avoid direct forex moves in order to continue momentum towards market-oriented reform and to avoid accusations of exchange rate-manipulation, he said.


USDCNY closed at 6.3932 Thursday at 4:30 pm Beijing time from Monday's 6.3682. The PBOC started to weaken its CNY fixing against the U.S. dollar from Wednesday after six straight trading days of stronger fixings, setting it at 6.4072 Friday.

Tan Yaling, head of the China Forex Investment Research Institute, also saw limited scope for further yuan strength, with the currency's ceiling likely at 6.30 in the short term, given the prospect for dollar strength and demand for greenbacks from overseas-listed Chinese companies needing to pay interim dividends expected around USD70 billion in June and July. While the PBOC move is not effective until June 15, forex trading volume has already dropped significantly, she said.

The PBOC's move on Monday only came after internal debate among departments, said an advisor familiar with policy making who asked to remain anonymous. While some officials argued for tolerating yuan strength in order to promote international use of the currency, others were concerned by the impact on exports and feared a one-way bet on appreciation was forming in markets, the advisor said.

The yuan rally of recent weeks was partially driven by unexpectedly strong exports, a trend which may continue as China's competitors take longer to recover from the pandemic, the advisor said. But the currency may weaken in the second half of the year, he said, as regulators may guide the market even lower.


In another move seen as aimed at curbing the yuan, the State Administration of Foreign Exchange said on Wednesday that it had issued new quotas recently to qualified domestic institutional investors (QDII) allowing them to buy up to USD10.3 billion in overseas assets, the largest sum so far authorised.

Xu Hongcai, deputy director at the Economics Policy Commission at the China Association of Policy Science, said the SAFE move would offset capital inflows. These should continue to be strong, as exports remain buoyant and China's economy grows by 5.8% next year, he said.

A new wave of Covid-19 in India and South East Asia may divert still more export business to China, in sectors such as textiles and timber, said Tan, a former Bank of China senior researcher, though exporters are having to contend with rising prices for commodities and shipping. The effect of the stronger yuan on exports may not show for two to three months, she said.

The SAFE has accelerated new qualified investor quotas since September, issuing a total of USD33 billion in the QDII category up to May this year to 89 institutions. But, while Chinese financial institutions have increased their foreign investment and lending, relatively low global yields and external risks may sap this outflow, said Lian.

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