New | Beijing tightens reins on yuan as PBOC battles outflows

The People’s Bank of China is using its official guidance rate to put a floor under the yuan, a move that suggests Beijing is worried enough about mounting capital outflows to resume intervention in the forex market.

The new strategy – or more accurately, the return to an old one – represents a step back from Beijing’s repeated commitments to meddle less in the foreign exchange market, but the central bank lacks attractive alternatives.

Letting the yuan slide sharply will only accelerate capital outflows, which would put upward pressure on interest rates just as the central bank wants to make money cheaper in order to stimulate the slowing economy and ease huge debt loads at many Chinese companies.

One alternative is to tighten up the capital account to “trap” money inside the country. That might relieve some of the pressure to manage the exchange rate, but would be a step back from reform.

However, the current strategy is not costless, traders say.

“Liquidity in the onshore market is okay so far, but if the central bank continues to lean against the market forces, transaction volumes could be affected,” said Wang Ju, senior Asian forex strategist at HSBC.