The central bank tries to curb the weakening of the yuan against the US dollar

The Chinese yuan has weakened considerably against the US dollar in recent weeks as the dollar strengthens and investors worry about China’s economic growth.

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BEIJING – The Chinese yuan strengthened slightly against the US dollar on Wednesday, reversing a sharp weakening trend after the People’s Bank of China signaled support for its currency.

The yuan has fallen about 3% this month as the US dollar strengthened, according to Wind Information. Prolonged Covid checks and concerns about Chinese economic growth have also weakened confidence in the yuan.

On Monday, the PBOC announced that it would reduce deposits by 1 percentage point to 8%, effective May 15. The move reduces the amount of foreign currency that banks must hold, which theoretically reduces the amount of weakening pressure on the yuan.

“This move serves as a strong policy signal [the] The PBOC is becoming uncomfortable with the rapidly depreciating currency,” Goldman Sachs analyst Maggie Wei and a team said in a report on Monday.

Analysts pointed out that the Chinese central bank raised the same foreign exchange reserve ratio twice last year to curb the rapid strengthening of the yuan.

Uncertainties remain high as Shanghai faces a prolonged lockdown and the rise of new local Covid cases in Beijing.

“Looking ahead, we expect this RRR cut to slow the CNY depreciation in the near term, although it would also depend on the broad trajectory of the USD and the general sentiment towards China’s growth,” the analysts said. “Uncertainties remain high as Shanghai faces a prolonged lockdown and new local covid cases rise in Beijing.”

On Wednesday, the PBOC pegged the yuan’s midpoint at 6.5598 against the dollar, the weakest adjustment since April 2021, according to FactSet data.

The US dollar has strengthened since the Federal Reserve embarked on a cycle of monetary policy tightening and interest rate hikes. The 10-year US Treasury yield has risen to more than three-year highs, erasing a premium once held on the 10-year Chinese government bond yield.

Fed-related market moves have made US dollar-denominated assets relatively attractive to investors, while there are general concerns about the economic policy stance in China, Stansberry senior analyst Schelling Xie said on Tuesday. China. He expects the yuan to be on a weakening trajectory, but said the pace will likely slow.

The Chinese yuan is traded onshore, on the mainland, and abroad, mainly in Hong Kong. The yuan may trade within a 2% range above or below a midpoint set daily by the PBOC based on recent market action.

The foreign-traded yuan topped a psychologically key level of 6.60 yuan against the dollar on Monday night, the weakest since fall 2020, according to data from Wind.

As of Wednesday afternoon, the offshore yuan held slightly stronger near 6.58 against the dollar. The onshore yuan was close to 6.55 yuan against the US dollar.

Morgan Stanley economists expect the onshore yuan to trade near 6.48 against the US dollar by the end of June.

“Overall, we believe the PBOC would tolerate some orderly weakness in the CNY, provided it is fundamentally driven,” the bank’s emerging market strategists said in a report on Monday. “But USD/CNY could break [the target] in the short term given the volatility of the market”.

Weak market sentiment

Mainland China’s mainland Shanghai and Shenzhen stock indices plunged on Monday in their worst day since February 3, 2020, in the first days of the initial impact of the pandemic.

The capital city of Beijing began mass testing in the main business district on Monday and ordered people in a smaller, affected area to stay home.

Shanghai, China’s largest city, has been under prolonged lockdown for about a month with no clear end date in sight.

Despite a better-than-expected first-quarter GDP report last week, several investment banks lowered their forecast for China’s full-year GDP in light of the latest virus outbreaks and Covid checks.

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Policymakers have expressed support for growth in recent weeks, but markets have remained more bearish.

“China’s policy response has been moderate and geared toward tax forwarding,” Citi analysts said in a report late last week. “Clearly, the authorities are not resorting to the old ways of stimulating indiscriminate leverage to stimulate the economy.”

Aside from cutting the foreign exchange deposit reserve, the central bank also lowered the general ratio of reserve requirements, the amount of cash that banks must hold, on Monday. But the 25 basis point reduction fell short of many analysts’ expectations.

Premier Li Keqiang told a meeting of the State Council, the top executive body, on Monday that the government should attach great importance to the economic impact of unexpected internal and external situations.

The PBOC said on Tuesday that it was aware of recent financial market volatility and would increase support for the economy with prudent monetary policy. But the announcement did not boost market sentiment much.

Mainland Chinese stocks rose on Wednesday, after a volatile day of trading the day before, in which major indices closed lower.

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