These increased efforts, deployed as the yuan has fallen around 7% since mid-August to a 14-year low of around 7.25 per dollar on September 28, range from unusually strong signals to to the market – last week the central bank asked state-owned banks to prepare to sell dollars – to administrative measures that increase the cost of short selling the yuan.
This has helped the yuan regain some traction against the dollar, which has also paused to breathe against other currencies, but analysts expect the yuan to weaken further in the coming months, with a risk of volatile gyrations along the way. “Given the strength of the dollar, we now expect (the dollar/yuan rate) to trade around 7.40 in October and November,” SEB said in a note.
While this was among the more pessimistic forecasts, ANZ and Goldman Sachs saw the yuan rate at 7.20 per dollar in the next three months or so, with Goldman also noting upside risks in the dollar/yuan, and Citi saying that it could reach 7.3 in a strong dollar environment. On Friday evening, the yuan was trading around 7.12 per dollar.
In a sign that investors don’t expect the new measures to dampen fluctuations in the yuan, expectations for future volatility valued in one-month yuan options have doubled over the past month.
For the Chinese authorities, who were particularly keen to stabilize the yuan rate ahead of a national holiday week in China this week, the stakes are high.
This is a politically sensitive time for the ruling Chinese Communist Party, which is due to open its five-year congress on October 16. President Xi Jinping is expected to win an unprecedented third term at the rally.
A weaker yuan is also likely to fuel financial instability fueled by capital outflows. In August, foreign investors reduced their holdings of Chinese bonds for the seventh consecutive month.
On the monetary policy side, the weakening yuan, fueled by the wide gap between low Chinese interest rates and rising US rates, is making it more difficult to ease policy to support the faltering economy. of China, the second largest economy in the world.
The yield spread between China’s benchmark 10-year government bonds and the US Treasury for the same duration is the widest in 15 years.
NO LINES IN THE SAND
Still, analysts don’t expect Beijing to mount a desperate defense of any particular level of the yuan, unlike the last two times the yuan broke the psychologically significant level of 7 to the dollar in 2019 and 2020, at most. in the wake of trade tensions between China and the United States and the start of the COVID-19 epidemic.
“The central bank has to strike a balance between being market-oriented and also ensuring financial stability,” said Ju Wang, head of FX and rate strategy for Greater China at BNP Paribas.
“Therefore, the official line will always be ‘no lines in the sand but two-way volatility’.”
The Chinese economy also derives some benefit from the weakness of the yuan, which supports its exports by making them relatively cheaper in dollar terms. The export sector has become a vital pillar for the economy as it struggles with COVID outbreaks and a housing crisis.
Additionally, the yuan has not fallen as sharply against the greenback as the euro, yen and other major currencies this year, allowing it to remain relatively resilient against a basket of major partner currencies. trade from China, down just 1.4% since the start of the year.
Chinese authorities, who have stressed that they want to make the yuan more international and more market-oriented, aim not to control the long-term value of the yuan, but to prevent a sudden short-term depreciation that would disrupt its economy and capital flows. , according to analysts.
“As China goes on vacation for a week, the threat of intervention in the offshore yuan could keep the brakes on near-term depreciation,” said Khoon Goh, head of Asia research at ANZ.
Mainland China’s financial markets are closed for the National Day holiday from October 1, during which there will be no onshore trading or daily guidance through mid-term settings. Trading will resume on October 10.
Goh added, however, that how long the enews threat remains in effect will depend on the trend of the dollar.
“While the authorities will want to maintain currency stability until the Party Congress, the growing yield differential between the United States and China could still see yuan weakness return later in the year.”