Yuan Drops as PBOC Cuts Reference Rate by Most Since Devaluation

China's Battle to Manage Slowing Growth
  • Monetary authority seen reducing intervention to prop up yuan
  • Li says foreign central banks to be allowed in onshore market

China’s yuan declined after the central bank lowered its fixing by the most since its August devaluation amid speculation the authority is turning away from active intervention to prop up the currency.

The People’s Bank of China cut the reference rate by 0.22 percent to 6.3772 a dollar, close to Wednesday’s onshore spot close of 6.3778. Major Chinese lenders have reduced sales of the greenback this week, after being seen in the market regularly since the devaluation, said a trader from a foreign bank. The selling of dollars contributed to a record $94 billion drop in China’s foreign-currency stockpile.

“The PBOC will have to reduce its intervention as it has to earn trust from the market, and the cost of supporting the yuan is not low,” said Kenix Lai, a foreign-exchange analyst at Bank of East Asia Ltd. Data released Thursday that showed a decline in producer prices and a slow recovery in consumer inflation indicate that fundamentals are still weak, she added.

The yuan in Shanghai, where moves are restricted to 2 percent on either side of the PBOC fixing, retreated 0.12 percent to 6.3852 a dollar as of 12:29 p.m. on Thursday, according to China Foreign Exchange Trade System prices. The freely traded currency in Hong Kong was little changed at 6.4682.

China’s currency regulator has asked financial institutions in Shanghai and Guangdong to step up checks in their foreign-exchange businesses, people familiar with the matter said on Tuesday. The central bank is probably stepping back from aggressive intervention and wants to observe whether the administrative steps are effective, according to Oversea-Chinese Banking Corp.

Foreign Banks

The yuan will be kept stable at a reasonable level, Premier Li Keqiang said on Thursday at a World Economic Forum meeting in Dalian, while announcing that foreign central banks would be allowed to trade in China’s onshore foreign-exchange market.

The yuan slid 2.6 percent in August, the most in two decades, after the central bank said on Aug. 11 that it was adopting a more market-based methodology to determine the reference rate.

“The fixing today is in line with the PBOC’s new policy,” said Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB. “It will continue to intervene to keep the yuan stable. It’ll need to cut lenders’ reserve-requirement ratios again this year as heavy intervention removes liquidity from the interbank market.”

— With assistance by Tian Chen

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