China Struggles to Stem Yuan Slide With Fixing, Verbal Warnings

(Bloomberg) — The yuan fell, an indication that China’s latest attempts to beef up the currency with a record pushback in the reference rate and verbal warnings is barely holding back a selling wave.

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The People’s Bank of China fixed the yuan at 6.9396 per dollar, 647 pips stronger than the average estimate in a Bloomberg survey of analysts and traders, the widest difference on record since Bloomberg started the survey in 2018. The onshore yuan dropped as much as 0.6% Monday even after state media cited the regulator as saying last week companies shouldn’t bet on the direction and extent of currency moves.

The escalation in the PBOC’s defense comes at the start of a week filled with global central bank meetings, during which the Federal Reserve and Bank of England are expected to raise rates to combat inflation. That will place China’s loose monetary policy further apart from its major peers, a move that would undermine the attractiveness of yuan-denominated assets.

The yuan weakened past the 7 level in both onshore and offshore trade last week, challenging policy makers’ tolerance for volatility before a twice-a-decade party reshuffle next month. Declines in the yuan have accelerated over the past month as the dollar has surged and China’s economy slowed due to Covid lockdowns and a housing-market crisis.

The best China’s “policy response can do is to slow pace of yuan depreciation but not reverse it, as weak China macro-fundamentals and dollar trend overwhelm,” said Christopher Wong, a foreign-exchange strategist at Oversea-Chinese Banking Corp. in Singapore.

Basically Stable

China made its latest effort to jawbone the yuan on Friday.

The currency will remain basically stable as pressures that led to short-term depreciation were already priced in, state-run CCTV reported, citing an official close to the PBOC. “There will not be a one-sided market for the exchange rate,” the official said, adding that two-way fluctuations will be normal and the central bank will curb speculation.

In another report Friday, China’s foreign-exchange regulator urged companies not to bet on the direction and extent of any currency moves. Short-term fluctuations of yuan are hard to forecast and firms should “refrain from speculative trading,” Wang Chunying, deputy administrator of the State Administration of Foreign Exchange, said in an interview with CCTV.

The yuan isn’t the only victim suffering from a jumping dollar. The 2.7% drop in Chinese currency over the past month is smaller than declines of more than 4% for the yen and South Korean won.

The central bank hasn’t been able to stop the broad-based dollar strength but “what is more surprising is that the yuan weakness has actually been quite orderly,” said Galvin Chia, a currency strategist at NatWest Markets. “For China, ultimately the risk this week looks to be with Fed and USD” and less the local factors.

The onshore yuan declined 0.5% to 7.0086 Monday, while the offshore rate fell 0.2%.

(Updates with NatWest comment in penultimate paragraph)