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China Takes Most Visible Step Yet To Curb Yuan Gain

(Bloomberg) – China forced banks to hold more foreign currency in reserve for the first time in more than a decade, its most important move yet to curb the yuan’s rise. The country’s financial institutions will have to hold 7% of their foreign currency in reserve from June 15, according to a central bank statement on Monday. This represents an increase of 2 percentage points, and the first such increase since 2007. This move, which the People’s Bank of China says will help with liquidity management, effectively reduces the supply of dollars and others. landed currencies – putting pressure on the yuan to weaken. Although analysts said the direct impact could be small, the move is the clearest signal from the PBOC that it is unhappy with the yuan’s surge to a three-year high against the greenback. Authorities had so far limited their response to rhetoric: A former central bank official and state media commentary criticized the currency over the weekend. slow it down and the market will fail if it wants to make speculative bets, ”said Zhou Hao, economist at Commerzbank AG in Singapore. “It’s more of a symbolic gesture, because no matter how the BPC increases the cost of financing on the foreign exchange, the yuan rate will almost always be higher.” The BPC on Tuesday set its daily benchmark rate at 6.3572, barely lower than the exchange rate. average forecast in a Bloomberg survey of analysts and traders. The currency gained 0.2% to 6.3634 per dollar at 9:52 am in Hong Kong, while the onshore rate strengthened 0.1%. Betting on the yuan has been a successful strategy over the past year. The currency has jumped 13% against the dollar since last May, when it was close to its lowest level since 2008 amid the effects of the pandemic and the trade war with U.S. brokers including Citic Securities Co. , Scotiabank and Westpac Banking Corp. currency to climb to 6.2 against the dollar. It would be the strongest since a 2015 devaluation. The yuan is supported by China’s economic recovery and its higher yielding markets are attractive to global investors. A context of imported inflation reinforces the argument for a stronger yuan. Against a basket of trading partners, the Chinese currency is the strongest since 2016. The rise in the foreign exchange reserve ratio would probably freeze around $ 20 billion in liquidity, according to Guan Tao, former head of the State Administration of Foreign Exchange. . The increase demonstrates the steadfast determination of the Chinese central bank to curb the rapid appreciation of the yuan, and the PBOC has more tools if speculation emerges in the currency market, he said. Recent history shows that traders should beware. In the wake of the devaluation, the yuan fell about 11% at the end of 2016, jumped 11% to its peak in 2018, before reversing again to drop 13% in September 2019 When the yuan’s momentum became too extreme, authorities often took steps to stop the movements. In early 2018, for example, the yuan fell the most in two months as authorities gave the green light to banks to submit quotes for weaker fixings. However, analysts are still not convinced of the power of the last measure. Fundamental factors supporting the yuan – such as its interest rate premium and high inflation – remain intact, economists at Citigroup Inc. led by Liu Li-gang wrote in a note. and increase foreign currency financing costs, its effectiveness remains in doubt, ”Liu wrote. Any tightening of dollar funding overseas will not be sustainable because global investors can easily get cheap foreign currency abroad and invest in yuan bonds, according to Ju Wang, a senior currency strategist at HSBC Bank Plc Beijing appears to be sticking to its goal of liberalizing markets as part of President Xi Jinping’s plans to reduce moral hazard. It is not just the yuan where direct intervention is now an unusual sight. The “national team” of state-backed funds are seldom seen in the $ 12 trillion stock market unless the moves risk turning into panic or mania. Even in the commodities market, where officials struggle to drive prices down, the efforts have been largely verbal rather than direct. weak, it could reinforce the belief that only brutal intervention is worth paying attention. Yet the Communist Party has made it clear that it will act to reduce speculation and guard against financial stability risks, especially as the Party’s centenary approaches in July. change, but probably the start of a trend, ”said Becky Liu, head of China macroeconomic strategy at Standard Chartered, of Monday’s move from the PBOC. “This could be seen as a new mechanism to manage the yuan in the medium term, along with other countercyclical measures.” (Add 5th paragraph to show PBOC fixing on Tuesday and latest yuan price.) More articles like this are available. at Subscribe now to stay ahead of the game with the most trusted source of business news. © 2021 Bloomberg LP

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