China asks banks to reduce or delay dollar buying.
China asks banks to reduce or delay dollar buying.
China’s Regulators Seek to Slow Yuan’s Depreciation by Asking Banks to Reduce Dollar Purchases
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Shanghai/Beijing, Aug 1 (ANBLE) – In a bid to counter the depreciation of the yuan, China’s currency regulators have asked some commercial banks to reduce or postpone their purchases of U.S. dollars, according to individuals familiar with the matter.
The move comes as the yuan has been adversely affected by China’s sluggish post-pandemic economic recovery and the rising yields of the U.S. dollar and other major currencies. China’s authorities have taken several steps this year to stabilize the currency.
Citing recent yuan depreciation, regulators have instructed banks to hold off on dollar purchases under their proprietary trading accounts. The People’s Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) have yet to make a public comment on this development. SAFE, however, emphasized the stability of exchange rate expectations and the need for a ‘risk-neutral’ mindset among companies and financial institutions.
Despite the recent depreciation, China’s financial authorities remain committed to maintaining the stability of the yuan. The tightly managed currency hit an eight-month low in July and has depreciated 3.6% against the dollar since the beginning of the year, positioning it as one of Asia’s worst-performing currencies.
While China has pledged to allow market forces to dictate the value of the yuan, concerns over currency stability were evident when the Politburo, the policy-making body, made a rare mention of the need for stability. This recent instruction to commercial banks to limit dollar demand indicates the central bank’s intent to support the currency and its ample arsenal of tools to defend it.
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By curbing non-urgent dollar demand, the pressure on the yuan can be alleviated, providing some respite. This isn’t the first time that a central bank-led self-regulatory body has taken such measures. Similar actions were taken in 2021 when banks were asked to cap the size of their proprietary trading accounts to counter yuan volatility.
Thus far, Chinese monetary authorities have made incremental policy adjustments, such as enabling companies to borrow more overseas and setting firmer-than-expected daily yuan benchmarks. Additionally, state-owned banks have engaged in yuan-buying activities.
Nevertheless, Goldman Sachs analysts argue that while these measures may slow the depreciation of the yuan, significant headwinds will continue to keep it weak. One key concern is the fragility of the debt-laden property sector, along with the divergence in monetary policies as China attempts to keep yields low to support economic growth.
The reluctance of authorities to expedite economic support measures has frustrated investors, leading to lackluster performance in China’s stock markets. Both the Shanghai stock market and the blue-chip CSI 300 index have lagged behind regional and global counterparts.
Foreign investors’ net purchases of domestic A-share stocks have reached approximately 230 billion yuan ($32.09 billion). However, inflows have almost stalled following the loss of the country’s post-pandemic economic bounce. Overseas institutional investors have also sold substantial amounts of yuan bonds.
The pressure on the yuan is further compounded by China’s growing services trade deficit, which more than doubled to $102.1 billion in the first half of the year. Outbound tourism and logistics play a significant role in this deficit. Additionally, there is a seasonal factor, as overseas-listed Chinese companies typically require more foreign exchange during the summer to fulfill dividend payments.
As the dollar continues to rise and investor optimism about China’s economic recovery wanes, it is anticipated that the yuan may retest its July trough of 7.25. The effectiveness of regulatory measures to stabilize the currency remains to be seen, as external factors and domestic challenges continue to impact its performance.
(Note: $1 = 7.1673 Chinese yuan)
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