China’s central bank on Thursday pushed the reference rate for the yuan up by 0.8 percent, the midpoint’s second largest one-day appreciation since the currency was de-pegged from the dollar in 2005, as it wages war on depreciation expectations. The spot rate followed suit, crossing the 6.8 per dollar level for the first time since Nov. 11 to trade at 6.7923 at 0333 GMT. The yuan has now been guided about 1.5 percent higher since May 24, when Moody’s Investors Service downgraded China’s sovereign credit rating for the first time since 1989.
In the offshore market, the currency has strengthened against the dollar by about 2 percent over that period. “The PBOC has let the yuan bulls loose in the China shop,” said Stephen Innes, senior trader at OANDA in Australia, referring to the People’s Bank of China.
“Needless to say, the market is a tad shell-shocked this morning while searching for some policy clarity from the PBOC.” Chinese stocks and the yuan have risen since the Moody’s downgrade, and some analysts believe the hand of the state is behind moves designed to dissuade bears.
The government last week also announced a proposed new methodology for setting the yuan’s midpoint, around which the currency is allowed to trade up to 2 percent up or down. The new mechanism would take into consideration “counter-cyclical factors”, although no details were given. Traders and economists believe this potentially gives the central bank more leeway to fix the rate as it sees fit, irrespective of prevailing market conditions.
Adopting measures to stabilise expectations for financial markets and boost confidence is a good idea at a time when investor confidence was “relatively fragile”, the state-run Financial News, a newspaper run by the central bank, said in a front page commentary.
“And it is more important to let the market understand that the Chinese economy has showed good and stable momentum, which would provide a solid base for stabilising development in the future,” it said.
Traders last week said major state-owned banks were selling dollars in the onshore market – a move sometimes interpreted as part of the government’s efforts to prop up the yuan. The yuan midpoint was fixed at 6.8090 per dollar on Thursday, lifting it 543 pips from the previous day’s rate to its strongest level since Nov. 10.
Zhou Hao, an economist at Commerzbank in Singapore, said the administrative measures and market intervention could help stabilise the onshore and offshore yuan exchange rates, but there was “little fundamental support” for a stronger yuan. “We still believe USD-CNY will spike up eventually,” he said in a note.