Yuan Advances Against Dollar, Basket Amid Bets of PBOC Support

  • Currency’s six-day rally against peers longest since July
  • China steps up efforts to guide expectations: PBOC researcher

China’s yuan advanced against both the dollar and a trade-weighted index this week amid speculation policy makers are propping up the currency.

The People’s Bank of China has raised the yuan’s daily fixing by 0.1 percent over the past four days, even as a gauge of the greenback’s strength climbed 0.2 percent. This helps limit declines because -- apart from the signal of support -- the onshore yuan’s daily moves are restricted to 2 percent on either side of the reference rate. The monetary authority has stepped up efforts to guide expectations on the exchange rate, Ma Jun, chief economist at the PBOC’s research bureau, said in a statement Thursday.

The yuan has advanced against a 13-currency index for six days in a row, the longest rally in almost five months, despite traders building up bearish positions. The exchange rate is facing increased pressure from accelerating capital outflows, the prospect of faster U.S. interest-rate increases and volatile domestic markets. The yuan, down the most this year in two decades, may weaken faster once an annual conversion quote for citizens is reset next month, according to strategists.

“China’s intention is very clear - it wants to limit the yuan’s declines and doesn’t want it to drop versus both the basket and the dollar,” said Kenix Lai, a Hong Kong-based foreign-exchange analyst at Bank of East Asia Ltd. “The basket will remain stable but not very strong in the near term, because China doesn’t need such strength when the economy is still weak.”

Tightening Controls

Apart from the fixings, policy makers have tightened capital controls to rein in outflows. Chinese residents’ purchases of insurance in Hong Kong using MasterCard Inc. and Visa Inc. credit cards issued in the mainland have been capped at $5,000 per product since Saturday, according to people with knowledge of the matter. In the past month, policy makers also made it harder for local firms to buy overseas assets and bring the yuan offshore.

Commercial banks should step up authenticity checks of their foreign-exchange business and guide investors to use funds in reasonable ways, Pan Gongsheng, head of the State Administration of Foreign Exchange, said on Wednesday. The risks of China’s cross-border capital flows are controllable, he was cited as saying in a statement posted on the regulator’s website Thursday.

The effort to curb declines in the yuan indicate also that U.S. President-elect Donald Trump’s tweets criticizing China for devaluing its currency may be hitting home. He has pledged to label the nation a currency manipulator and slap 45 percent tariffs on its exports to the U.S. The PBOC has added a stronger bias to the fixing rate amid dollar strength to slow down the pace of yuan depreciation, said Joey Chew, Asian foreign-exchange strategist at HSBC Holdings Plc.

"The PBOC wants to manage market sentiment with apparently stronger fixings and also a higher CFETS index, as it doesn’t want global investors or the nation’s top leaders to think the yuan is headed for a bottomless slump," said Zhou Hao, an economist at Commerzbank AG in Singapore. "The basket will stabilize or even rise to as high as 96 by the end of this year, as the dollar rallies and Chinese policy makers try to rein in depreciation."

— With assistance by Tian Chen, and Emma Dai

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