Yuan erases gains as central bank’s move to stifle short-selling is not enough to halt the slide
China’s yuan dropped on Monday, erasing all of Friday’s increase when the central bank decided to make it more expensive to short the currency.
On Friday, the People’s Bank of China (PBOC) raised the reserve requirement ratio to 20 per cent from zero for financial institutions when conducting onshore yuan forwards business on behalf of customers. The move sparked a sharp rebound in the currency later that day.
The yuan continued to recover on Monday morning, climbing by as much as 0.38 per cent, the biggest rise in almost two weeks on an intraday basis, before reversing to a decline to trade at 6.8454 per dollar.
The PBOC is buying time now to defend the 7-per-dollar level, where it will have a huge impact on capital flight
On Monday, the central bank lowered the daily yuan reference rate to 6.8513 against the dollar, in line with predictions made by bank models in recent months.
Analysts said that while the PBOC’s surprise move was aimed at squeezing out bearish short trades and slowing down the yuan’s slide toward the critical 7 per dollar level, it was a softer measure than a direct intervention in the foreign-exchange market or an interest rate hike – a measure used by Argentina when it attempted to curb the sliding peso this year.
PBOC’s action may inject some near-term stability in the currency, but it would not change the long term bias for yuan weakness, said Heng Koon How, head of markets strategy at United Overseas Bank.