Serious Concerns Over Yuan in China

Serious Concerns Over Yuan in China

"Selling dollars at the state bank has become the 'new normal' to slow down the pace of yuan depreciation," said an unnamed financial trader based in Shanghai to Reuters, as reported by the Business portal.
Offshore branches of state banks were also observed selling dollars during trading in London and New York this week, according to two insiders on Thursday. Such dollar sales could limit the decline in the value of the so-called offshore yuan.
Since the beginning of this month, the yuan has lost around 2.4% against the dollar, a total of six percent since the start of the year.

The recent acceleration in the yuan's decline is a result of the increasing yield differentials between China and the US, as well as growing investor concerns about China's weak economic growth and rising risks of default in its real estate and banking sectors in the shadow.

The slow implementation of government stimulus measures to boost growth has disappointed investors. Meanwhile, the People's Bank of China (PBOC) has eased its monetary policy to support the economy, although the price paid for reducing interest rates puts greater pressure on the yuan.

This week, yield differentials between China and the US reached their highest level in the last 16 years, as investors speculated that the PBOC would further ease its policy after a sudden rate cut this week.

A similar tactic was seen in September 2022, when the PBOC also instructed major state banks to be prepared to sell dollars for yuan in offshore markets while trying to stop the yuan's decline.

In July, the central bank adjusted parameters to allow companies to borrow more foreign debt to bring in foreign exchange for conversion onshore, thus supporting the yuan. However, higher interest rates on foreign loans continue to discourage foreign borrowing, undermining the impact of this policy change, according to Reuters.

One tactic that seems to have worked is state banks offering to lend fewer yuan in the offshore Hong Kong market, as liquidity constraints there helped stabilize the yuan's decline this week, traders said.

Yuan borrowing costs in Hong Kong jumped to their highest level since April 2022 on Wednesday, and the overnight CNH Hong Kong Interbank Offered Rate (CNH HIBOR) increased. Liquidity reduction wasn't too drastic as aggressive yuan liquidity removal from that market could negatively affect bond market sentiment, Reuters analysts concluded.