The Chinese yuan has weakened sharply against the US dollar in recent weeks as the greenback strengthens and investors worry about China’s economic growth.
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BEIJING — The Chinese yuan edged up slightly against the US dollar on Wednesday, reversing a sharp weakening trend after the People’s Bank of China signaled support for its currency.
According to Wind Information, the yuan fell about 3% this month as the US dollar strengthened. Ongoing Covid controls and worries about Chinese economic growth have also weighed on sentiment towards the yuan.
On Monday, the PBOC announced it would cut deposits by 1 percentage point to 8% effective May 15. This move reduces the amount of foreign currency banks need to hold, theoretically reducing weakening pressures on the yuan.
“This step is a strong political signal [the] The PBOC is uneasy about the currency’s rapid depreciation,” Goldman Sachs analyst Maggie Wei and a team said in a report Monday.
The analysts pointed out that the Chinese central bank raised the same foreign exchange reserve ratio twice last year to slow the rapid strengthening of the yuan.
Uncertainties remain high as Shanghai faces a protracted lockdown and new local Covid cases surge in Beijing.
“Looking ahead, we expect this RRR correction to slow CNY depreciation in the short-term, although that would also depend on the broad USD path and overall Chinese growth sentiment,” the analysts said. “Uncertainties are still high as Shanghai faces a protracted lockdown and new local Covid cases surge in Beijing.”
On Wednesday, the PBOC set the yuan midpoint at 6.5598 against the dollar, the weakest fix since April 2021, according to FactSet data.
The US dollar has appreciated since the Federal Reserve began a cycle of monetary tightening and interest rate hikes. The US 10-year Treasury yield has soared to over 3-year highs, erasing a premium on the Chinese 10-year yield that was once held.
Market moves related to the Fed have made US dollar-denominated assets relatively attractive to investors amid general unease about the stance on China’s economic policies, Schelling Xie, a senior analyst at Stansberry China, said on Tuesday. He expects the yuan to be on a weaker course but said the pace is likely to slow.
The Chinese yuan is traded onshore – on the mainland – and offshore, mainly in Hong Kong. The yuan can trade within a 2% range above or below a midpoint set by the PBOC daily based on recent market movements.
The offshore-traded yuan topped a psychologically significant level of 6.60 yuan against the dollar late Monday — the weakest since autumn 2020, according to Wind data.
On Wednesday afternoon, the offshore yuan remained slightly stronger, near 6.58 against the greenback. The onshore yuan was nearly 6.55 yuan against the US dollar.
Morgan Stanley economists expect the onshore yuan to trade near 6.48 against the US dollar by the end of June.
“Overall, we believe the PBOC would tolerate some orderly CNY weakness as long as it is driven by fundamentals,” the bank’s emerging markets strategists said in a report on Monday. “But USD/CNY could overshoot [the target] short term given market volatility.”
Weak market sentiment
The mainland China’s main stock indices in Shanghai and Shenzhen plummeted Monday on their worst day since Feb. 3, 2020 — in the early days of the pandemic’s first shock.
The capital Beijing began mass testing in the main business district on Monday and ordered people in a smaller, hard-hit area to stay home.
Shanghai, China’s largest city, has been under a prolonged lockdown for about a month with no clear end date in sight.
Despite a better-than-expected first-quarter GDP report last week, several investment banks have lowered their forecast for China’s full-year GDP amid the recent virus outbreaks and Covid controls.
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Policy makers have expressed support for growth in recent weeks but markets have remained more bearish.
“China’s policy response has been mild and biased toward fiscal frontloading,” Citi analysts said in a report late last week. “The authorities are clearly not resorting to old-school pump-priming methods to indiscriminately release leverage to boost the economy.”
Aside from cutting foreign exchange deposits, the central bank also cut the overall reserve ratio — the amount of cash banks are required to hold — on Monday. But the 25 basis point reduction fell short of many analysts’ expectations.
Premier Li Keqiang said Monday at a session of the State Council, the top executive body, that the government must attach great importance to the economic impact of unexpected situations at home and abroad.
The PBOC on Tuesday said it was aware of recent financial market volatility and would increase support for the economy through prudent monetary policy. But the announcement didn’t do much for market sentiment.
Mainland China stocks were higher on Wednesday after a volatile day of trading a day earlier that saw major indices closed lower.
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