China’s central bank has asked some of the country’s biggest lenders to refrain from immediately squaring their foreign exchange positions in the market and to run open positions for a while to alleviate downside pressure on the yuan. According to two sources with knowledge of the matter, this informal “window guidance” has been issued by the People’s Bank of China to banks that have conducted U.S. dollar sales to clients. Most banks are typically permitted to run a net long or short position in spot dollar-yuan markets within defined limits.
The directive is the latest effort by China to smooth currency movements and reduce pressure on the yuan, which has lost around 5% against the dollar this year as investors have grown increasingly concerned about the fragility of the debt-laden property sector and divergence in monetary policy towards a more deflationary path. The move could alleviate some of the downward pressure on the yuan. It will be beneficial ahead of China’s golden week holidays in early October, which traditionally sees a spike in overseas travel and dollar demand.
China has been trying to slow the pace of yuan depreciation by setting midpoint fixings consistently stronger than market expectations and reducing the amount of foreign exchange reserves required to be held by Chinese banks. It is also trying to reduce the use of foreign exchange derivatives in the domestic market and encourage more local corporate demand for yuan.
However, the yuan’s slide has continued due to China’s faltering post-pandemic economic recovery, rising yields for the dollar and a lack of confidence in the government’s ability to maintain stable growth. As a result, the dollar has gained more than 5% against the yuan this year and is currently trading at 7.2735 yuan.
PBOC’s informal directive to stagger and adjust dollar purchases by banks is one way that it is trying to keep non-urgent demand for the greenback in check. This could keep the yuan’s losses at bay for a while, though it is unlikely to stop the currency from continuing its descent in the longer term.
The PBOC did not immediately respond to a request for comment from Reuters. Still, the State Administration of Foreign Exchange (SAFE) told a local media outlet that exchange rate expectations are stable and will continue pushing for a risk-neutral mentality in the banking industry. The SAFE’s statement was translated by Reuters and was published on Thursday. The agency does not usually comment on the yuan’s market performance.