The yuan hovered near its 15-year low in the last session of October despite China’s months-long efforts to defend the currency. The yuan depreciation is raising speculation of extreme measures from Chinese authorities.
Data from MarketWatch shows that the yuan traded around 7.25 yuan per dollar on Friday, October 28, after falling to its weakest level since 2007 earlier this week.
The Chinese currency has lost 14.1% so far this year.
According to an analysis from Bloomberg, China’s central bank has recently tapped most of its policy instruments to boost the currency. As a result, it now has some tough choices to make.
The yuan has kept falling due to pressure from a strong dollar, the country’s economic headwinds, and repeated COVID outbreaks.
This year, a 13% dollar rally has pushed the yuan to the weak end of the 2% daily trading band, and the specter of extreme measures is increasing.
Analysts said the extreme measures are likely to be the last resort. They would drain China’s foreign reserves and raise fears of capital controls if taken.
Mingze Wu, a forex trader at StoneX Group in Singapore, said China could use a more aggressive tool, but it will be cautious because it wants to internationalize the yuan.
According to Bloomberg, there are some measures that China’s central bank could use to support its currency.
Traders said that China is intervening in the market to slow the yuan’s decline. In fact, major state-owned banks have been selling dollars over the past several days.
This is the most likely option for the Chinese Communist Party.
Second, narrowing the trading band
The central bank could limit the yuan’s daily trading band. It last revised the band in 2014, widening the limit from 1% to 2%.
But China is unlikely to ban the band because it now wants to allow more market-driven price action and to internationalize the yuan.
Third, adjusting the fix
China’s central bank may ultimately initiate a one-time adjustment to consolidate the yuan’s fixation.
However, according to some analysts, China may refrain from taking any extreme measures in the near future.
According to the latest data from the Bank for International Settlements, the yuan has become the fifth most traded currency in the world.
The yuan rose three places in the bank’s triennial survey on currency trading as China increased transactions with Russia following the international sanctions imposed on Moscow.