Like other currencies that have depreciated against the dollar, the yuan has lost 12 percent against the greenback since the beginning of the year.
Central Bank Warns Currency Speculators
The onshore exchange rate of the Chinese yuan against the greenback recently plunged to 7.2458 to the dollar, its lowest level since January 2008. The latest drop in the yuan came just days after the exchange rate between the two currencies crossed the 1:7 mark. Since that date – September 15, 2022 – the yuan has depreciated by more than 3%.
Overall, the Chinese yuan has lost more than 12 percent against the U.S. dollar since the beginning of the year. According to a Reuters report the Chinese yuan, like other global currencies, has struggled against the dollar since the U.S. Federal Reserve began marginally raising interest rates.
Interest rate hikes are a tool used by the U.S. Federal Reserve to control the country’s inflation rate, which peaked at 9.1 percent in June 2022.
However, after the yuan fell to its lowest exchange rate in more than 14 years, the People’s Bank of China (PBOC) reportedly said it would now prioritize stabilizing the yuan.
In addition to reassuring the markets, the PBOC also warned of the repercussions that those betting against the yuan will face. The PBOC is quoted as saying:
Do not bet on a one-way appreciation or depreciation of the yuan, as losses will certainly be incurred in the long run.
Instead of betting against the currency, the central bank urged currency market participants to “voluntarily safeguard market stability and be firm when they need to smooth out sharp rises or falls in the exchange rate“.
China’s stealthy intervention
According to a Bloomberg article, the Chinese central bank’s warning is aimed at companies accused of placing speculative bets on the yuan. The warning is also aimed at financial institutions that would violate the country’s policies.
Before the yuan fell on September 28, the POBC reportedly signaled its intention to “to curb speculative demand“by imposing a 20 percent risk reserve requirement ratio (RRRR) on financial institutions that buy foreign currencies via foreign exchange forward contracts. An article in the South China Morning Post, citing analysts at Goldman Sachs, suggests that the PBOC hopes the RRRR increase will slow the depreciation of the yuan before the 20th Chinese Communist Party Congress.
Meanwhile, Grant Wilson, a senior advisor at macroeconomic consulting and data analysis firm Exante Data, insisted in a recent opinion piece that Chinese monetary authorities may have already resorted to covert support for the yuan. However, because the intervention is stealthy, it only appears “in the balance sheets of Chinese state banks as net foreign currency assets, rather than in the official reserves of the PBOC“.
According to Grant Wilson, the Chinese authorities intervene in this way because it limits the appreciation of the yuan while supporting exports. Fear of being labeled a currency manipulator is another reason why Chinese monetary authorities may have chosen to intervene covertly.
“The stability of official reserves ensures that China does not meet any of the three criteria used by the U.S. Treasury to label a country as a currency manipulator“, explained Grant Wilson.