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Chinese regulators say the yuan has been relatively stable compared to other major currencies when measured against the US dollar. Photo: AFP

China yuan: worst over after volatility went ‘beyond expectations’, US dollar may weaken, Beijing says

  • China is better positioned to deal with currency volatility and cross-border capital flows, says Pan Gongsheng, deputy governor of the central bank
  • Economic growth momentum is recovering quickly as the impact of the pandemic subsides and government stimulus kicks in, Pan says

The worst is over for the yuan, according to Chinese regulators, who say resources have been mobilised to shore up the economy and the US dollar could weaken due to the Federal Reserve’s dilemma of balancing growth and inflation.

The economy is now better positioned to deal with currency volatility and cross-border capital flows, two key parameters used to measure the health of China’s external sector, Pan Gongsheng, deputy governor of the People’s Bank of China (PBOC), said on Thursday.

“Yuan exchange rates are basically stable with two-way fluctuations,” he said, attributing recent volatility to changes in the domestic and external environment since March that “had gone beyond expectations”, including a stronger US dollar.

“But the yuan has been relatively stable compared to the level of depreciation of other major currencies against the US dollar. And it has been stable against a basket of currencies.”

The US dollar index in early May rose to a 20-year high of 104 in anticipation of more aggressive rate hikes in coming months.

Tightening by the US Federal Reserve triggered volatility in the yuan’s exchange rate between 2015-17 and it is causing a headache for authorities again this year, especially as Beijing is loosening monetary policies to help the pandemic-hit economy.

Investors have dumped billions of dollars’ worth of Chinese treasury bonds and A-shares in February and March, especially after Russia’s invasion of Ukraine.

The yuan sell-off also continued from mid-April as Shanghai was locked down and foreign companies grew more frustrated with disruptions due to zero-Covid controls.

We believe China’s forex market has a better foundation than the first five months
Pan Gongsheng

“Looking forward, we believe China’s forex market has a better foundation than the first five months to ensure steady operations,” said Pan.

Growth momentum was recovering quickly as the impact of the pandemic subsided and government stimulus kicked in, he said.

“Externally, US inflation has stayed at a high level and it has increased more slowly,” said Pan.

“Many market institutions believe it will become more difficult for the Fed to stabilise growth while controlling inflation. There are also growing signs of Eurozone tightening. These factors have led to the recent fall in the US dollar exchange rate and also reflected market expectations for the future.”

The State Council, China’s cabinet, released a 33-point support plan and convened a rare video conference with 100,000 cadres last week, urging them to get the economy back on track.

China’s push to loosen US dollar dominance takes on new urgency

The yuan’s midpoint weakened by around 6 per cent against the US dollar from mid-April to mid-May, but it has rebounded by 1.1 per cent since then and ended at 6.7095 per US dollar on Thursday.

Beijing, which enforces stringent capital controls, is confident the currency can absorb international shocks through exchange rate flexibility.

Apart from a 1 percentage point cut to the required reserve ratio for foreign exchange deposits in mid-May, there have been no signs of obvious market intervention to prop up the yuan’s value.

China’s merchandise trade surplus and foreign direct investment will help balance cross-border capital flows, Pan added.

China’s actual utilised foreign direct investment grew by 26.1 per cent in the first four months from a year earlier to US$74.5 billion, according to the Ministry of Commerce. The January-April trade surplus totalled US$212.9 billion, an increase of 42.3 per cent year on year.

“Yuan assets remain attractive for the stability of the Chinese currency and it will serve diversification needs,” said Wang Chunying, deputy head of the State Administration of Foreign Exchange.

“Portfolio investment adjustments don’t jeopardise the trend of growth in the medium and long run.”

Net inflows into the A-share market expanded to 18.1 billion yuan (US2.7 billion) last month from April’s 6.3 billion yuan, according to data from Eastmoney.

Beijing is also mulling ways to lure more money into its financial markets. On June 30, China’s exchange-traded bond market was opened to foreign institutional investors.

‘We don’t want to become anyone’s enemy’: China wary of US forex threats

Authorities also plan to optimise “panda bond” issuance – or yuan-denominated bonds issued by foreign investors in China – and simplify business procedures for qualified foreign institutional investors.

Last week, financial and commerce regulators released a joint circular announcing an investigation into the impact of exchange rate volatility on businesses. They also ordered banks to provide more hedging services for Chinese companies, especially for small- and medium-sized exporters.

About 2.2 trillion yuan worth of merchandise trade in the January-April period was settled in the Chinese currency, up 26 per cent on year, according to Li Bin, head of the PBOC’s macro prudential policy bureau.

The figure accounted for about 16 per cent of the country’s merchandise trade, an increase of 1.3 percentage points from the end of 2021, he said.