China seeks measures to cool down the Yuan

Chinese Yuan. (Photo: AFP/VNA)

In the context of the Chinese Yuan (CNY) being on a strong upward trend against the USD, Chinese authorities are sending out many signals to stabilize the domestic currency and curb the current increase.

Recently, the People's Bank of China (PBOC) set the daily reference rate at 7.0733 yuan per USD. This figure is 164 points lower than the market forecast and is the largest difference since the beginning of 2022. This shows that the PBOC wants to proactively slow down the current appreciation of the yuan.

In addition, some sources said that major Chinese state-owned commercial banks are currently buying large amounts of USD from the spot market this week to help authorities regulate the pace of price fluctuations, in the context that the Yuan exchange rate against the USD has just reached a 14-month high and has increased by more than 3% since the beginning of the year.

China collects USD to cool down the hot increase of domestic currency

China’s major state-owned banks have been buying U.S. dollars in the domestic spot market this week and hoarding the currency, according to people familiar with the matter, in an unusually aggressive effort to curb the strength of the yuan.

According to market sources, the unusual difference this time is that after buying, the banks did not return the USD to the financial market as usual through the swap market. This “hoarding” move seems to be intended to make the USD supply locally scarce, thereby increasing the cost of buying RMB to speculate and wait for the price to increase.

This move to curb the appreciation makes holding the yuan less attractive and riskier for investors. The reason is that the profit from the slight increase in the exchange rate at this time is not enough to compensate for the loss due to the interest rate difference, because holding USD will earn high interest rates, while the interest rate when holding yuan is much lower.

One of the sources said that the above action of the state banks is aimed at regulating the rate of appreciation of the yuan, not reversing the upward trend. This is a move that continues the efforts of the state banks to "rein in" the upward momentum, helping the domestic currency to rise more gradually and steadily instead of increasing dramatically.

The dollar buying spree comes as the yuan surged to a 14-month high on December 3. The Chinese currency has gained about 3.3% against the dollar year to date, and as of December 4, it was on track for its biggest annual gain since the pandemic year of 2020.

The tightly managed currency's rally has been supported by tacit signals of approval from authorities, with the yuan's daily central reference rate repeatedly set higher than market expectations.

However, the rise has been tempered by state-owned banks, fueling speculation that Chinese authorities aim to create a gradual rise to avoid a run on the yuan by exporters and to demonstrate the stability needed to encourage global use of the currency.

The yuan weakened slightly to 7.072 per dollar after Reuters reported on the trading activity by state-owned banks.

Source: https://vtv.vn/trung-quoc-tim-bien-phap-ha-nhiet-dong-nhan-dan-te-100251205085241747.htm