Yuan Declines Most in a Year on Bets PBOC Will Buy Local Debt

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The yuan slid the most in a year on bets China’s central bank will boost the supply of funds by buying local government debt and cutting interest rates.

The People’s Bank of China is considering direct purchases of notes issued by regional authorities from the market, Market News International reported Monday, citing people it didn’t identify. The authority reduced the amount of cash major banks need to set aside as reserves by 1 percentage point to 18.5 percent effective April 20. The PBOC may cut interest rates next month, Huatai United Securities Co. said in a note.

“The yuan’s decline was driven by speculation that the central bank will boost liquidity by reducing interest rates and buying debt from local governments to support the economy,” said Nathan Chow, a Hong Kong-based economist at DBS Group Holdings Ltd. “But the yuan will remain stable in the near-term despite today’s tumble, as the authorities are openly supportive of the currency.”

The yuan declined 0.41 percent, the most since March 2014, to close at 6.2206 a dollar in Shanghai, China Foreign Exchange Trade System prices show. In Hong Kong’s offshore market, the currency slid 0.4 percent, the largest drop in three months, to 6.2215, according to data compiled by Bloomberg.

The PBOC is discussing unconventional policies to rebuild its balance sheet and revive the economy, Market News reported. The central bank could buy assets directly from the banks, freeing them up to purchase local government bonds, or buy local debt directly from the market, it said.

China’s industrial profits declined 0.4 percent in March, the National Bureau of Statistics reported Monday, following a drop of 4.2 percent in the first two months of this year. Banks sold a net 356.2 billion yuan ($57 billion) of foreign exchange for clients last month, up from February’s 61.2 billion yuan, the State Administration of Foreign Exchange said on its website last week.

The People’s Bank of China raised its reference rate by 0.03 percent to 6.1220 a dollar, the strongest level since Jan. 16. The gap between the onshore yuan and the fixing was 1.61 percent, within the 2 percent limit.

— With assistance by Tian Chen

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