After months of grappling with a weakening yuan, China's central bank now faces a new challenge: managing the currency's unexpected strength. In August, the yuan has gained 1.3% against the dollar, nearly erasing its losses from the first half of the year. This marks the longest winning streak for the yuan in over three years, raising concerns among Chinese authorities about the potential impact on the domestic economy.
The yuan's recent rally has been driven by external factors, such as growing expectations for Federal Reserve interest rate cuts and a surge in the Japanese yen. Despite China's ongoing economic challenges and capital outflows, these developments have provided a temporary boost to the yuan.
However, Chinese authorities are quietly taking steps to prevent the yuan from appreciating too quickly, as a sharp rise could destabilize domestic financial markets and hurt exporters. The People's Bank of China (PBOC) has relaxed some restrictions on gold imports and trading positions in the yuan for certain banks, signaling a cautious approach to managing the currency's strength.
"The government is probably less concerned about depreciation but remains wary of FX volatility," said Gary Ng, senior economist for Asia Pacific at Natixis. He added that while the pressure on the yuan may ease if the Federal Reserve cuts rates, there could still be sudden shifts in capital flows.
One of the PBOC's main concerns is the unwinding of speculative short yuan positions, which have built up during the currency's decline since early 2023. If the yuan continues to rise rapidly, these positions could be unwound in a disorderly manner, leading to market disruptions.
Foreign companies and domestic exporters in China have been engaged in the yuan carry trade, exchanging yuan for dollars to earn higher returns. Analysts at Macquarie Group estimate that these entities have accumulated over $500 billion in foreign currency holdings since 2022. As the yuan strengthens, there are concerns that the unwinding of these positions could trigger financial market shocks.
"As the yuan appreciates... concerns about the potential unwinding of yuan carry trade and shocks to financial markets may arise," said Zhu Chaoping, global market strategist at J.P. Morgan Asset Management.
To better understand the market dynamics, China's currency regulator, the State Administration of Foreign Exchange (SAFE), recently surveyed banks about their clients' FX conversion ratios. This information could help authorities gauge the potential for increased yuan buying as the currency appreciates.
"FX settlement is the issue that everyone in the market is mostly concerned about, besides the Fed rate cut," said Liu Yang, general manager of the financial market business department at Zheshang Development Group.
In a move to further manage the situation, the PBOC has relaxed guidance that previously banned banks from holding short yuan positions at the end of the trading day. Additionally, the central bank has issued new gold import quotas to some banks, a measure typically employed when the yuan is under depreciation pressure.
These subtle measures, combined with the PBOC's daily guidance on the yuan's value, indicate a desire to contain volatility rather than prevent the currency from appreciating altogether. Analysts at BofA Securities have adjusted their yuan forecasts, now expecting the currency to weaken to 7.38 per dollar by year-end, down from a previous forecast of 7.45. Currently, the yuan is trading around 7.14 per dollar.
(Source:www.zawya.com)
The yuan's recent rally has been driven by external factors, such as growing expectations for Federal Reserve interest rate cuts and a surge in the Japanese yen. Despite China's ongoing economic challenges and capital outflows, these developments have provided a temporary boost to the yuan.
However, Chinese authorities are quietly taking steps to prevent the yuan from appreciating too quickly, as a sharp rise could destabilize domestic financial markets and hurt exporters. The People's Bank of China (PBOC) has relaxed some restrictions on gold imports and trading positions in the yuan for certain banks, signaling a cautious approach to managing the currency's strength.
"The government is probably less concerned about depreciation but remains wary of FX volatility," said Gary Ng, senior economist for Asia Pacific at Natixis. He added that while the pressure on the yuan may ease if the Federal Reserve cuts rates, there could still be sudden shifts in capital flows.
One of the PBOC's main concerns is the unwinding of speculative short yuan positions, which have built up during the currency's decline since early 2023. If the yuan continues to rise rapidly, these positions could be unwound in a disorderly manner, leading to market disruptions.
Foreign companies and domestic exporters in China have been engaged in the yuan carry trade, exchanging yuan for dollars to earn higher returns. Analysts at Macquarie Group estimate that these entities have accumulated over $500 billion in foreign currency holdings since 2022. As the yuan strengthens, there are concerns that the unwinding of these positions could trigger financial market shocks.
"As the yuan appreciates... concerns about the potential unwinding of yuan carry trade and shocks to financial markets may arise," said Zhu Chaoping, global market strategist at J.P. Morgan Asset Management.
To better understand the market dynamics, China's currency regulator, the State Administration of Foreign Exchange (SAFE), recently surveyed banks about their clients' FX conversion ratios. This information could help authorities gauge the potential for increased yuan buying as the currency appreciates.
"FX settlement is the issue that everyone in the market is mostly concerned about, besides the Fed rate cut," said Liu Yang, general manager of the financial market business department at Zheshang Development Group.
In a move to further manage the situation, the PBOC has relaxed guidance that previously banned banks from holding short yuan positions at the end of the trading day. Additionally, the central bank has issued new gold import quotas to some banks, a measure typically employed when the yuan is under depreciation pressure.
These subtle measures, combined with the PBOC's daily guidance on the yuan's value, indicate a desire to contain volatility rather than prevent the currency from appreciating altogether. Analysts at BofA Securities have adjusted their yuan forecasts, now expecting the currency to weaken to 7.38 per dollar by year-end, down from a previous forecast of 7.45. Currently, the yuan is trading around 7.14 per dollar.
(Source:www.zawya.com)
