China made it more expensive to bet against the yuan in the derivatives market, ramping up support for the currency as it slides toward the weakest level since the 2008 financial crisis.
The People’s Bank of China (PBOC) yesterday said that it would impose a risk reserve requirement of 20 percent on banks’ foreign-exchange forward sales to clients.
That is after the yuan depreciated on Friday to a level closest to the weak end of its allowed trading band since a shock currency devaluation in 2015. Pressure on the exchange rate has worsened lately due to the US dollar’s surge and as the local economy suffers from COVID-19 curbs and a slowing property sector.
Photo: EPA-EFE
The yuan extended losses yesterday and its depreciation past 7.1854 per US dollar would send it to the weakest level since early 2008.
The PBOC’s attempt to support the currency comes on top stronger-than-expected yuan fixings since last month, which limits the currency’s moves by 2 percent on either side.
It also earlier this month reduced banks’ foreign-currency reserve requirements to boost the yuan.
“By imposing the risk reserve requirement, the PBOC aims to slow the pace of depreciation, but it will unlikely turn the tide,” NatWest Markets economist Liu Peiqian (劉培乾) said. “The currency weakness is in line with most major currencies and the broad dollar strength.”
The additional risk reserve requirements would make it expensive for traders to buy foreign-exchange through forwards or options, a move that might curb bearish yuan bets.
The central bank had lifted the risk reserves for foreign-exchange forward trading from zero to 20 percent in 2015, before lowering it two years later and raising it again in 2018.
The PBOC yesterday set the yuan fixing weaker than 7 per US dollar for the first time since 2020.
Liu sees this as a clear signal that the PBOC does not intend to defend any specific yuan levels.
Onshore yuan fell 0.5 percent to 7.1633 per US dollar as of 2:22pm. It was trading about 1.9 percent weaker than the fixing of 7.0298 per US dollar.
Currencies across the region are tumbling as the US Federal Reserve leads most other central banks in shifting away from an easy monetary policy.
Japan intervened to prop up the yen for the first time since 1998, while India’s efforts to protect the rupee are shrinking currency reserves at a rate that is poised to eclipse the drawdown during turmoil a decade ago. The British pound plunged to a record low while US Treasury yields surged yesterday, adding to the US dollar’s strength.
The PBOC has more policy tools at hand to defend the currency, HSBC Holdings PLC foreign exchange strategist Chen Jingyang (陳敬陽) said.
“We haven’t seen a lot of signs of meaningful intervention.” “If we saw a quick fall in trade weighted yuan, then we might see more direct intervention or another cut to the foreign exchange reserve ratio,” she said.
The yuan’s weakness might push the PBOC to delay any further monetary policy easing until later this year. After a surprise cut to a key interest rate last month, the PBOC paused its easing this month as the Fed hiked rates.
Bloomberg Economics estimates the Fed will tighten through next year and the PBOC will maintain an easing stance over the period, cutting its one-year rate to 2.45 percent by the end of next year.
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