China intensified efforts on Monday to stabilize the weakening yuan

China intensified efforts on Monday to stabilize the weakening yuan, which has been under pressure due to a stronger U.S. dollar, declining Chinese bond yields, and rising trade tensions. The measures include relaxing rules for offshore borrowing and issuing verbal warnings as the currency hovers near a 16-month low against the dollar.

The links are to the original pieces announcing the relevant move.

Key Actions by Chinese Authorities:

1. Raising Offshore Borrowing Limits:

   • The People’s Bank of China (PBOC) increased the macro-prudential adjustment parameter from 1.5 to 1.75, allowing companies to borrow more from abroad. This move aims to enhance cross-border financing, optimize asset-liability management, and provide additional funding sources for enterprises and financial institutions.

2. Commitment to Currency Stability:

   • The China Foreign Exchange Committee pledged to keep the yuan exchange rate stable at reasonable levels, combat pro-cyclical market behaviors, and prevent excessive exchange rate volatility.
   • PBOC Governor Pan Gongsheng reiterated that China has the confidence and capability to maintain the stable operation of its foreign exchange market.

3. Market Interventions: (first posted a week ago, the market caught up 3 days later)

   • The central bank plans to sell 60 billion yuan worth of six-month yuan bills in Hong Kong on January 15, the largest since 2018. This measure is aimed at reducing market liquidity to curb speculative bets against the yuan.

4. Midpoint Fixing Strategy: (again today)

   • The PBOC has been setting the yuan’s official midpoint guidance on the firmer side of key levels, signaling unease over recent depreciation and attempting to guide market expectations.

Analyst Opinions and Market Impact:

• Analysts believe these measures signal China’s intent to stabilize the yuan, though the practical impact on capital flows and exchange rates may be limited due to the lower cost of domestic financing (ie rate differential with the US, for example)
• Regulators are expected to rely primarily on the daily midpoint fixing as the main tool to influence the currency and market sentiment.

Current Market Context:

• The onshore yuan was trading near 7.3315 per dollar, close to a 16-month low, and has depreciated over 3% against the dollar since November. The depreciation reflects a combination of external pressures and domestic challenges.

This article was written by Eamonn Sheridan at www.forexlive.com.