In recent months, China has sought to stabilize the yuan by orchestrating purchases by state-owned banks and providing market guidance to bankers.
The moral coercion strategy marks a sharp break from Beijing’s approach when the currency was last on the ropes in 2015.
That’s when the People’s Bank of China (PBOC) resorted to official intervention as the central bank burned through $1 trillion in reserves to prop it up.
This year, as China’s economy faltered and money left the country, the PBOC took a completely different approach, defending the currency by signaling to markets what kind of selling it would and would not tolerate.
Interviews with 28 market participants show at least two dozen instances this year of regulators closely and frequently directing market participants through a series of coordinated actions to resist strong downward pressure on the yuan.
The PBOC and the State Administration of Foreign Exchange, the currency regulator, did not respond to faxed questions from iFreshBriefs about its approach. PBOC Governor Pan Gongsheng previously said regulators would prevent exchange rates from overshooting and maintain stable operations in the foreign exchange market.
A strategy by market participants and analysts described to iFreshBriefs prevented a destabilizing decline in the yuan.
But they told iFreshBriefs it also chilled large parts of China’s foreign exchange market, collapsing trading volumes and raising questions about the yuan’s chances of becoming a global reserve currency.
“The situation is currently significantly more complex due to a combination of domestic and global macroeconomic factors,” stated Eswar Prasad.
Tolani Senior Professor of International Trade Policy at Cornell University.
He described the PBOC as using “non-standard foreign exchange intervention measures” as a form of “sorting” to stop the yuan from falling too quickly.
As the currency of the world’s second-largest economy and largest exporter, the value of the yuan determines the price of goods around the world and trillions of dollars in capital flows. It also acts as an indicator of the challenges faced by China.
China’s foreign exchange regulator, speaking on the condition of anonymity, stated that the currency’s value is primarily driven by fundamental factors and is presently influenced by how “effectively China can prevent decoupling.” this refers to the Western attempts to decrease economic reliance on China.
More Than Ten traders polled by iFreshBriefs said the key warnings first emerged in June, when the PBOC’s daily yuan guidance, which sets its trading range for the day, known as the midpoint, began to diverge from market expectations.
In theory, the midpoint is based on contributions from 14 banks and refers to the previous day’s trading and overnight movements, which should make it easier for markets to forecast.
But in August, the midpoint deviation from traders’ estimates was read by traders polled by iFreshBriefs as a signal that the PBOC does not want the currency to go where markets are pushing it.
AGAINST THE TIDE
Currency management can be messy. In 2015, China cut the central yuan by 2%, with the PBOC saying it was a one-off move to bring the trading band in line with market prices. Fearing further devaluation, however, investors sold Chinese assets, sending stocks and the yuan into freefall and forcing the bank to use reserves to stabilize the currency. This time, efforts to manage the yuan included more targeted and specific instructions to banks and currency market participants, according to traders who spoke to Reuters.
For example, whenever there appeared to be momentum against the yuan, state-owned banks quietly became buyers, traders said. This generally happened around psychologically significant currency levels and seemed to aim to limit volatility. These traders told iFreshBriefs that in late May they saw state banks step in with a two-day buying of the yuan after the currency hit a 2023 low.
Similarly, state-owned banks’ yuan purchases intensified in December after Moody’s downgraded China’s credit rating outlook. Individual traders were unable to estimate the size of the purchase, and iFreshBriefs could not confirm whether such trading was directed by the central bank.
The official data did not indicate that the PBOC sold dollars directly as it did in 2015. However, market participants noted that banks sold dollars obtained through currency swaps, which would not be visible in such data.
At the same time, smaller lenders have been met with increased “guidance,” or anecdotal verbal advice, from regulators for both banks and their clients to reduce dollar holdings, according to six trader and bank sources.
In June and July, China’s FX Market Self-Regulatory Framework, overseen by the PBOC, told big state banks to cut dollar deposit rates, which would encourage exporters and households to convert dollar income into yuan, market watchers said.
WORK ON THE PHONE
The pressure on bankers reflected pressure on the yuan, which has fallen nearly 2.8% against the dollar this year, even as the benchmark lost 2.2%.
On September 8, the yuan hit a 16-year low. Days later, executives from eight major banks were summoned to Beijing to meet with PBOC officials, according to five banking sources, two of whom attended the meeting. They were told that companies looking to buy more than $50 million would need approval from the PBOC, three of the sources said. Bankers also said they needed to limit spot trading, stagger purchases of the dollar and not hold net long dollar positions at the end of any trading day, two of the sources said.
Authorities have also focused on monitoring exporters’ plans to buy and sell foreign currency, given their large currency holdings and excessive influence over yuan movements.
In recent months, regulators have been calling banks and asking them for surveys on an almost weekly basis about the intentions of export customers, according to officials at six banks who spoke to iFreshBriefs. Such calls were previously sporadic and surveys were sent only monthly.