China’s yuan slips against US dollar after Beijing taps financial tools to cool exchange rate

The yuan-US dollar exchange was 6.39 on Thursday afternoon, weakening from 6.36 on Monday, putting the brakes on its recent surge

Follows moves to raise the reserve requirement for banks’ foreign exchange deposits and allow more investment abroad under QDII programme

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The yuan-US dollar exchange was 6.39 on Thursday afternoon, weakening from 6.36 on Monday. Photo: Reuters

Published: 5:30pm, 3 Jun 2021Updated: 9:25am, 4 Jun 2021

China dug deeper into its bag of tricks this week to slow the rise of the yuan against the US dollar, but it faces an uphill battle as the American currency weakens and money pours into the country following its strong post-pandemic recovery.

On Tuesday, the government granted new quotas to domestic financial institutions allowing them to invest overseas under the Qualified Domestic Institutional Investor (QDII) programme.

The State Administration of Foreign Exchange (SAFE), the nation’s foreign exchange regulator, approved US$10.3 billion worth of QDII quotas for 17 financial institutions, the largest batch since it resumed granting new quotas in September last year.

By allowing greater capital outflows, it will increase demand for foreign currencies, putting downward pressure on the yuan.

The move came a day after the People’s Bank of China (PBOC) raised the amount of money that financial institutions must hold in reserve for their foreign exchange deposits, which analysts estimated would wipe US$20 billion from the foreign exchange market when the rule comes into effect on June 15.

The new measures appear to have had the intended effect, halting the yuan’s rise against the US dollar. The yuan-US dollar exchange was 6.39 on Thursday afternoon, weakening from 6.36 on Monday.