With virtually every currency weakening against the dollar, Chinese policymakers must decide whether it’s worth it to fight a slump in the heavily regulated yuan.

The Chinese currency is rapidly approaching levels that will prompt authorities to end devaluations in 2020 and 2019, as the yuan moves closer to 7.2 against the dollar, about
a percent lower. % from the current level. Strategists say it’s only a matter of time before the yuan drops to 7, a key line of defense for China’s central bank in recent years, preventing short-term disruptions since from the year
of Donald Trump. Beijing’s depreciation limit remains uncertain.

But the scale and intensity of the actions taken so far suggest that the focus is on the speed rather than the direction of the yuan’s movement. A soaring dollar and uncertainty about China’s export strength are among the reasons why authorities accept a weaker currency, as long as it doesn’t cause financial or social instability. ahead of a major Communist Party rally next month.

Chinese currency is near the previous low

“If the yuan falls to 10 and the euro and yen stabilize against the dollar, that will be a much more difficult question”, Jim O’Neill, an advisor to the Chatham House Principal. “But if the dollar strengthens against all currencies due to Fed tightening, there’s not much China can do.”

While the yuan is down more than 8% against the greenback this year and on track for a seventh straight month of decline, it is still outperforming some of the significant silver coins in the region. The won has fallen about 6% this year against the Chinese currency, while the yen has weakened more than 12% against the currency.

The yuan is weakening for various reasons, namely the different monetary policies with much of the world, interest rate differentials, capital outflows, and the slowdown in the Chinese economy. Country. But further losses could spark speculation that authorities are freeing the coin, prompting traders to bet on further price drops. The PBOC has long opposed such one-way bets.

“That’s the challenge that comes with a regulated currency – there are more signals about what policymakers are doing or not doing,” said Viraj Patel, strategist at Vanda Research in London, said. “Too much weakness is often a red flag for foreign investors, as it shows that Chinese officials may know something that we don’t.”

The People’s Bank of China has taken a series of measures to ease the pressure caused by the dollar, including setting the benchmark rate higher than expected for 13 consecutive days.

It also reduces the amount of foreign currency that banks have to hold in reserve. State-owned banks have been found to be selling dollars while some local banks are said to have used a mechanism that enhances the value of the yuan when submitting the PBOC’s price fixing calculations.

None of these actions seem strong enough or deter traders from showing a stronger downtrend in the renminbi. The rhetoric from policymakers is also less alarming: PBOC Vice Governor Liu Guoqiang on Monday said the yuan’s depreciation against the dollar this year is much less than that of the dollar. other major currencies. Swinging back and forth will be the norm in the short term, he added, while cautioning against betting on specific levels.
Some analysts think the yuan could weaken further. Bank of America Corp. predicts the coin will end the year at $7, while Nomura Holdings Inc. saw it drop to 7.2.

“Spot levels are determined by both internal and external factors,” said Lemon Zhang, currency strategist at Barclays Plc in Singapore. “Defending a particular level against obstacles from both can be expensive and ineffective.”

There are really few signs of panic in the currency markets at the moment. According to Anders Faergemann, senior portfolio manager at PineBridge Investments in London, that should be maintained as long as the yuan’s movements are in line with economic fundamentals.

But he warned that any delay in escaping China’s strict Covid Zero policy or further deterioration in the country’s housing crisis could easily bring calm into chaos.

Policymakers have plenty of reserves to manage the currency, including further easing foreign exchange reserve requirements for banks or increasing banknote issuance to tighten liquidity. of the renminbi in foreign markets is traded more freely.

Analysts at Bank of New York Mellon Corp said they also have more aggressive measures in place such as adding a risk premium on FX, which will discourage speculators by increasing the cost of funding in dong. dollars. and Mizuho Bank Ltd.

“Needless to say, if the yuan weakens past 8.5, policymakers will have serious questions to answer,” said Faergemann.

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