PBOC Snuffs Out Yuan Movement as China Tackles Stock-Market RoutFion Li
China’s central bank has adopted a vice-like grip on the yuan, allowing near-zero movement as policy makers contend with a sell-off in the stock market.
The currency’s closing levels in Shanghai this week have been 6.2096 or 6.2097 versus the dollar, matching the tightest range recorded since a fixed exchange rate ended a decade ago. While there’s been a de-facto peg of about 6.20 in place since March, daily moves have been kept to no more than 0.01 percent for the past month and a gauge of expected swings fell this week by the most in five months.
“Yuan stability is more important than before given that the equities market still hasn’t recovered,” said Banny Lam, co-head of research at Agricultural Bank of China International Securities in Hong Kong. “Some investors are in a wait-and-see mode as poor economic readings may prompt the government to roll out more stimulus measures.”
The Shanghai Composite Index of shares has fallen 28 percent since its June 12 peak amid concern economic growth is faltering. China has already cut interest rates four times in the past year and lowered lenders’ reserve requirements to spur spending and investment. The government will release July trade and inflation data over the weekend, while industrial output and investment figures are due on Wednesday.
A measure of one-month implied volatility dropped 33 basis points from July 31, the biggest weekly decline since March, according to data compiled by Bloomberg. It was steady on Friday, as was the exchange rate. The People’s Bank of China has kept the yuan stable in recent months to spur global usage as it argues the case for the currency to gain official reserve status at the International Monetary Fund in a November review.
The country’s foreign-exchange reserves declined for a third month, falling to $3.65 trillion in July, according to data from the People’s Bank of China on Friday.
The IMF said this week the yuan trails its global counterparts in major benchmarks and that “significant work” in analyzing data is needed before deciding whether to add the currency to its Special Drawing Rights basket. Its staff members on Tuesday proposed delaying any expansion of the basket by nine months, until September 2016, in the event that a decision is made in China’s favor.
“The extension gives China more leeway to comply with the IMF’s requirements and prepare for full inclusion in September 2016,” Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong, wrote in a note Thursday. “We expect the renminbi to remain stable against the U.S. dollar.”
The central bank set the yuan’s daily reference rate at
6.1174 a dollar on Friday, little changed from July 31. The gap between the spot rate and the fixing was 1.5 percent, within the 2 percent limit allowed by the PBOC. The central bank reiterated on Tuesday that it will keep the yuan stable at a reasonable, equilibrium level.
The offshore yuan in Hong Kong rose 0.06 percent this week to 6.2176 a dollar as of 4:56 p.m. local time. It gained 0.02 percent on Friday.
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