Yuan halts slide against US dollar after PBOC comments

  • The Chinese yuan edged higher on Friday after People’s Bank of China governor Yi Gang said measures to help alleviate corporate financing problems and encourage commercial banks to boost lending are on the way
PUBLISHED : Friday, 19 October, 2018, 2:11pm
UPDATED : Friday, 19 October, 2018, 2:11pm

China’s yuan halted its recent sharp slide on Friday after statements from senior regulators pledging support for private firms facing liquidity problems and because official data showed the central bank undertook smoothing operations to support the currency.

Onshore yuan, traded in China, fell by as much as 0.07 per cent to touch a fresh 21-month low on Friday before rebounding 0.05 per cent Thursday’s close to stand at 6.9338 against the dollar. Offshore yuan, that is traded outside the mainland, rose 0.07 per cent to 6.9348 per dollar.

The People’s Bank of China governor Yi Gang said that China’s stock valuations are not in line with sound economic fundamentals, and that the central bank will roll out targeted measures to help ease corporate financing problems and encourage commercial banks to boost lending to private firms.

The comments come as the Shanghai Composite index hit a four-year low on Thursday as companies with liquidity difficulties were forced to sell their pledged shares for funds that in turn caused prices in the stock market to sink further.

Data on Thursday showed that PBOC’s position for foreign exchange purchase fell by 119.4 billion yuan (US$17.22 billion) in September from the previous month, the biggest drop since January 2017. “While the PBOC is comfortable with some yuan weakness as long as it is driven by market forces, the data suggests it was intervening to support the yuan that month,” said Westpac Asia head of macro strategy, Frances Cheung.

Nevertheless, the yuan appears likely to resume its declines despite attempts by regulators to shore up market sentiment given the ongoing trade war with the United States was starting to impact negatively on China’s economy. It may consolidate below the 6.95 per dollar resistance level for now before continuing its march toward the closely watched key 7 level in the coming weeks or months, analysts said.

China’s economy grew 6.5 per cent in the third quarter from a year earlier, its weakest pace since the global financial crisis, government data showed on Friday, and below estimates for a 6.6 per cent expansion in an analyst poll by Reuters.

China aims to open up its capital markets to a broader set of foreign investors, which is expected to lead to greater domestic market volatility as market forces play a greater role in setting the yuan’s value.

“When the risks from share-backed loans are mitigated and eliminated properly, the yuan is likely to be allowed to drop through the 7.00 mark particularly if the dollar strengthens across the board and if the US-China tensions escalate further,” Gao Qi, emerging market Asia currency strategist at Scotiabank said.