In recent months, China has implemented strategies to stabilize the yuan, marking a departure from its approach in 2015 when the currency faced pressure. Unlike in 2015, when the People’s Bank of China (PBOC) burned through $1 trillion in reserves to support the yuan, this year, the central bank has focused on moral suasion and market guidance.
The PBOC’s approach involves signaling to the market what type of selling it is willing to tolerate, representing a shift from official intervention. Reuters’ interviews with 28 market participants reveal that regulators have actively steered market participants through various coordinated actions to resist strong downward pressure on the yuan. The PBOC, as well as the State Administration of Foreign Exchange, has employed this strategy, which has prevented a destabilizing slide in the yuan.
This approach has been effective in preventing a rapid depreciation of the yuan, but it has also had unintended consequences. The interventions have led to a significant chill in large parts of China’s foreign exchange market, resulting in crashing trading volumes. This raises concerns about the yuan’s prospects of becoming a global reserve currency.
Market analysts describe the PBOC’s strategy as “triage” to prevent the yuan from depreciating too rapidly. As the world’s second-largest economy and the biggest exporter, the value of the yuan is critical in determining global prices and capital flows.
Traders first noticed a shift in June when the PBOC’s daily yuan guidance began to deviate significantly from market expectations. This divergence indicated that the central bank did not want the currency to move in the direction the market was pushing it. By August, the deviation from trader estimates signaled the PBOC’s desire to resist downward pressure on the yuan.
In contrast to 2015, where China implemented a one-off devaluation and experienced significant capital outflows, this time, efforts to manage the yuan involved more targeted and specific directions to banks and currency market participants. State-owned banks reportedly became buyers whenever momentum was against the yuan, particularly around psychologically significant currency levels, to contain volatility.
While official data shows no evidence of the PBOC selling dollars outright, market participants note that banks sold dollars acquired through currency swaps. Additionally, smaller lenders received unofficial advice from regulators to reduce dollar holdings.
The PBOC has also employed non-standard measures to intervene in the foreign exchange markets, aiming to prevent exchange rate overshooting risks and maintain stable FX market operations. This approach has prevented a destabilizing yuan slide, but its impact on the foreign exchange market is evident in the significantly reduced trading volumes.
Regulators have been actively monitoring exporters’ foreign exchange buying and selling plans, focusing on companies with large currency holdings. Surveys and calls to banks on the intentions of exporter customers have become more frequent, emphasizing the central bank’s efforts to control yuan moves.
While the PBOC’s strategy has maintained stability in the yuan’s value, it has also led to a notable decline in onshore trading volumes. The volume of yuan traded onshore plummeted 73% from August to a record low in October. Despite concerns about the chilling effect on the market, the yuan has stabilized above its 16-year low reached in September.
Market participants appear hesitant to directly challenge the PBOC, but the central bank’s interventions raise questions about the long-term implications for the yuan’s global standing and its potential as a global reserve currency.
