Amid the yuan depreciating against the dollar, the People’s Bank of China (PBOC) has introduced several monetary interventions. The most recent announcement on September 26 was to increase the risk reserve requirement ratio for forward-exchange sales to 20%

The yuan (RMB) is stumbling due to the growing disparity between an uber-hawkish Federal Reserve and dovish policymakers in China. On Monday, September 26, USDCNY (Dollar-RMB) rate closed at a new 28-month low of 7.0298. It was 378 pips or 0.54% weaker than the closing price at 6.992 last Friday.

PBOC’s action could signal deeper worries about the impact of a surging U.S. dollar and the desire to maintain positive sentiment across financial markets. 

Wen Bin, the chief economist of China Minsheng Bank, said, “It is part of counter-cyclical adjustments to maintain the supply-demand balance in forex markets.” Accordingly, on May 26, 2017, the quotation model of the central parity rate of the yuan against the U.S. dollar was adjusted from “closing price + changes in a basket of currency exchange rates” to “closing prices + changes in a basket of currency exchange rates + counter-cyclical factors.”

When there are obvious fluctuations in the foreign exchange market and the yuan continues to depreciate, the “counter-cyclical factor” will be added. For example, on August 30 and September 1 and 2, the People’s Bank of China used the factor to raise the central parity rate of the yuan against the U.S. dollar by 0.46%, 0.29%, and 0.22%, respectively.

Serena Zhou, a senior China economist with Mizuho Securities, said, “More interventions could be rolled out, with offshore market liquidity the next possible target.”

The onshore yuan opened lower at 7.138 per U.S. dollar and finally closed at 7.1464 on the same day, the weakest yuan rate since May 28, 2020.

If the yuan against the dollar price keeps lowering, this could negatively impact capital outflows and ramp up financial risks. Eurekahedge data from “With Intelligence” reported that China-focused hedge funds saw net outflows of $3.6 billion this year, the most significant record since 2008. The data is remarkable since the Chinese market has seen net inflows recently. It was a net inflow of $1.8 billion in 2021 and $8.7 billion in 2020. 

Regulatory scrutiny, policy uncertainties, and economic woes are the mounting risks that don’t support yuan depreciation. As a result, Ken Cheung, the chief Asian FX strategist at Mizuho Bank, believes the move is unlikely to reverse the yuan depreciation trend. Economists at Goldman Sachs also added, “We expect the yuan to remain weak in the near term,” with the critical level to watch at 7.2.

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