Strong words, subtle moves: how China fights to defend the yuan
Beijing wages war of words and widens regulation to safeguard value of its currency
China is opting for strong words and subtle trading tactics to gamble against the market over the yuan’s value in the first days of 2017, displaying a strong desire to avoid any sharp yuan weakening.
The offshore yuan exchange rate gained 1,600 basis points against the dollar on Wednesday and Thursday, as liquidity in the Hong Kong yuan market dried up, pushing the overnight yuan borrowing rate to 110 per cent on Thursday, the highest level ever.
China’s yuan mid-price in the onshore market marked the biggest gain on Friday since 2005 when China reformed its yuan exchange rate system.
The unusual market swings came after the People’s Bank of China made a series of statements in the past week to guard the yuan – at midnight last Wednesday it reminded the market that the yuan exchange rate hadn’t yet touched the key level of seven, it adjusted a basket of currencies to play down the dollar weighting, and China’s foreign exchange regulator explained new rules of individual foreign exchange purchases to smooth public concerns on New Year’s Eve, just to name a few.
When words proved insufficient, China’s monetary authorities intervened in the offshore market.