Central Bank Seeks to Contain Renminbi’s Rise

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The People’s Bank of China has changed tack on exchange rates following ongoing gains in the yuan against the greenback.

The Chinese yuan central parity rate against the US dollar rose 35 basis points on 11 September to reach 6.4997, while the offshore rate saw a slight increase to around 6.51.

Amidst unyielding gains in the yuan, PBOC has made two new policy adjustments to curb further gains in the Chinese currency.

The central bank has firstly rescinded the deposit requirement for currency forwards, which will reduce the cost for companies and investors to purchase dollars while simultaneously selling the yuan.

According to analysts this move will put downward pressure on the yuan, while the central bank’s official notice said it would serve to “fend off macro-financial risks.”

PBOC has also rescinded the 20% reserve requirement for yuan deposits made by foreign banks which was launched in January last year.

The move will increase the volume of funds in Hong Kong’s offshore yuan market, giving overseas investors greater scope to short the Chinese currency.

“Those two policies were macro-prudential measures launched against a background of two years of RMB exchange rate fluctuations and definite pro-cyclical capital flows,” said Sun Guofeng, a researcher with PBOC.

“Given the significant changes that have occurred in the current market environment, these two policies need to be adjusted.”

The policy changes mark a major shift in China’s exchange rate policy, which for the past two years has focused upon preventing the yuan from depreciating too rapidly and undermining economic confidence.

This led to tighter capital controls, greater scrutiny of outbound investments and the spending of as much as USD$1 trillion in foreign exchanges to firm up the rmb.

Official sources said to The Wall Street Journal that this month authorities would likely wind back measures to contain Chinese outbound investment that were introduced last year at a time when the yuan was seeing rapid decline.

Those curbs caused Chinese outbound investment in the first half of 2017 to drop 45.8% year-on-year to USD$48.19 billion, and investment in overseas real estate to plunge 82%.

 

 

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