China warns against ‘gambling’ on yuan, says stabilising forex market top priority
- People’s Bank of China says in a rare and stern warning that stabilising the foreign exchange market is a top priority
- Onshore yuan finished the domestic trading session on Wednesday at 7.2458 per US dollar, its weakest close since January 2008
China’s central bank issued a stern warning against one-way bets on the yuan’s depreciation, ordering banks to shoulder responsibility to stabilise the currency which weakened to its weakest level against the US dollar since the 2008 global financial crisis on Wednesday.
“The foreign exchange market is of great significance, and its stability is the top priority,” said the statement following a meeting chaired by PBOC vice-governor Liu Guoqiang and attended by officials with the State Administration of Foreign Exchange and more than a dozen state-owned banks.
The meeting of the China Foreign Exchange Market Self-Regulated Body also targeted currency speculation and irregularities by financial institutions.
Don’t gamble on one-way appreciation or depreciation of yuan. Such gambling will eventually end up with a loss
“What should be realised, it can never be precisely forecast a specific level of the exchange rate. Two-way fluctuations are a normality. Don’t gamble on one-way appreciation or depreciation of yuan. Such gambling will eventually end up with a loss,” it said.
The regulators stressed the role both the market and the government can play in managing the yuan in a reminder that Beijing has plenty of tools available to defend the currency.
“The current regime has survived rounds of external shocks in the past. The People’s Bank of China has accumulated rich experience and it can effectively manage market expectations,” added the statement from Tuesday’s meeting, which was released on the PBOC website on Wednesday.
“The yuan has appreciated obviously against the euro, British pound and Japanese yen so far this year. It is one of a few strong currencies in the world.
“China has a solid foundation to maintain basic stability in the yuan exchange rate.”
The meeting also told commercial banks to conduct transactions based on risk-neutral principles and to provide real liquidity to market, while government departments were ordered to enhance monitoring and analysis to curb speculation.
Members of the self-discipline mechanism must safeguard the basic stability of [the foreign exchange] market and prevent big volatility of exchange rates
“Members of the self-discipline mechanism must safeguard the basic stability of [the foreign exchange] market and prevent big volatility of exchange rates,” it said.
“The authoritativeness of the yuan’s midpoint reference rates has to be maintained.”
The onshore yuan has fallen by about 3 per cent against the US dollar over the past week after the US Federal Reserve raised interest rates by 75 basis points for the straight third time and indicated more increases are in the pipeline.
The onshore yuan finished the domestic trading session at 7.2458 per US dollar, its weakest close since January 2008.
The offshore yuan also slid past 7.2 per US dollar on Wednesday to the weakest level in a decade.
What will China’s central bank do to slow depreciation of the yuan?
Reuters reported earlier that the central bank had asked local banks, which participate in the daily fixing of the yuan’s exchange rate, to revive a countercyclical factor last employed two years ago.
The central bank uses yuan quotes from local banks to set the daily reference rate to defend the currency, with the onshore yuan allowed to trade 2 per cent either side of the fixing.
Globally, major central banks have scrambled to strengthen their positions and defend their currencies against a strong US dollar.
The British pound reached a record low against the US dollar on Monday, while the Bank of Japan also intervened in the market on Friday as the yen plunged to a nearly 20-year low.
