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China has effectively contained a possible run on the yuan in 2023 through strategic interventions, a departure from its approach in 2015 when significant reserves were depleted to stabilize the currency.
In recent months, the People's Bank of China (PBOC) has introduced moral suasion measures to instruct market participants and state banks to prevent severe devaluation pressure on the yuan. This nuanced strategy, which included specific instructions to banks and targeted interventions, contrasted with the approach of the 2015 official intervention.
Despite China's economic challenges and capital outflows, the PBOC communicated its intentions to markets and signaled tolerance levels for yuan devaluation.
The official non-manufacturing purchasing managers' index (PMI) rose to 50.4 in December from 50.2 in November, reflecting a broader recovery in services and construction.
Market participants reported instances of state-owned banks discreetly purchasing yuan to counter bearish momentum, particularly near key currency levels. This strategic approach, aimed at containing volatility, was seen during critical periods, such as late May and December, when state banks increased their purchases of yuan.
The PBOC's use of “non-standard measures” has been described as a form of “triage” to prevent a rapid devaluation of the yuan.
Although the stabilization of the currency was successful, concerns were raised about the chilling effect on China's foreign exchange market, leading to a decline in trading volumes and questions about the yuan's prospects as a global reserve currency.
Traders noted a divergence between the PBOC's daily yuan guidance and market expectations, suggesting the central bank is unwilling to let the currency follow market forces. This was in contrast to 2015, when official reserves were used extensively to stabilize the yuan amid fears of further devaluations.
Regulators including the State Administration of Foreign Exchange have reportedly issued “window guidelines” to reduce dollar holdings, and major state-owned banks have been ordered to cut dollar deposit rates to encourage switching to the yuan.
Additionally, exporters faced increased scrutiny as regulators conducted regular surveys to monitor their foreign exchange plans.
Despite a significant decline in onshore yuan trading volume, the currency stabilized above its September 16 low.
While market participants are cautious about directly opposing the PBOC, they continue to keep an eye on the yuan's performance, reflecting ongoing uncertainties in China's foreign exchange landscape.
(With Reuters input)
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