The central bank is trying to slow down the weakening of the yuan against the US dollar

The Chinese yuan has weakened sharply against the US dollar in the last few weeks as the dollar strengthens and investors worry about China’s economic growth.

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BEIJING – The Chinese yuan strengthened slightly against the US dollar on Wednesday, reversing a sharp weakening trend after the People’s Bank of China signaled support for its currency.

The yuan has fallen about 3% this month as the US dollar strengthened, according to Wind Information. Prolonged Covid control and concerns about Chinese economic growth have also weakened sentiment on the yuan.

On Monday, the PBOC announced that it would cut deposits by 1 percentage point to 8% with effect from 15 May. The measure reduces the amount of foreign currency that banks have to hold, which theoretically reduces the amount of weakening pressure on the yuan.

“This move serves as a strong political signal [the] The PBOC is getting uncomfortable with the rapid depreciation of the currency, “Goldman Sachs analyst Maggie Wei and a team said in a report Monday.

Analysts pointed out that the Chinese central bank last year increased the same foreign exchange reserve ratio twice to slow the rapid strengthening of the yuan.

Uncertainty remains high as Shanghai faces a protracted shutdown and new local Covid cases rise in Beijing.

“Looking ahead, we expect this RRR cut to slow CNY depreciation in the short term, although it will also depend on the broad USD path and the overall sentiment towards Chinese growth,” analysts said. “Uncertainty remains high with Shanghai facing a prolonged shutdown and new local Covid cases rising in Beijing.”

On Wednesday, the PBOC set the yuan midpoint at 6.55598 against the dollar, the weakest fix since April 2021, according to FactSet data.

The US dollar has strengthened since the Federal Reserve began a cycle of monetary tightening and rate hikes. The US 10-year government bond yield has risen to above three-year highs, which has erased a premium that the Chinese 10-year government bond yield once had.

The Fed-related market movements have made U.S. dollar-denominated assets relatively attractive to investors, while there is general unrest over the stance of China’s economic policy, Schelling Xie, senior analyst at Stansberry China, said Tuesday. He expects the yuan to be on a declining path, but said the pace is likely to slow.

The Chinese yuan is traded onshore – on the mainland – and offshore, primarily in Hong Kong. The yuan can trade within a range of 2% above or below a midpoint set daily by the PBOC based on recent market developments.

The offshore-traded yuan peaked at a key psychological level of 6.60 yuan versus the dollar late Monday – the weakest since the fall of 2020, according to Wind data.

As of Wednesday afternoon, the offshore yuan remained slightly stronger, near 6.58 against the dollar. The onshore yuan was close to 6.55 yuan against the US dollar.

Morgan Stanley economists expect the onshore yuan to trade close to 6.48 against the US dollar by the end of June.

“Overall, we believe the PBOC would tolerate some orderly weakness in the CNY as long as it is driven by the fundamentals,” the bank’s emerging market strategists said in a report on Monday. “But the USD / CNY could exceed [the target] in the short term given market volatility. “

Weak market sentiment

China’s primary stock index in Shanghai and Shenzhen fell on Monday on their worst day since February 3, 2020 – in the early days of the initial shock of the pandemic.

The capital Beijing on Monday began mass trials in the largest business district and ordered people in a less hard-hit area to stay home.

Shanghai, China’s largest city, has been under prolonged lockdown for about a month with no clear end date in sight.

Despite a better-than-expected first-quarter GDP report last week, several investment banks cut their forecast for China’s full-year GDP in light of recent virus outbreaks and Covid checks.

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Politicians have expressed support for growth in recent weeks, but markets remained more pessimistic.

“China’s political response has been mild and aimed at fiscal front-loading,” Citi analysts said in a report late last week. “The authorities are clearly not resorting to old, pumping ways of unleashing arbitrary leverage to stimulate the economy.”

Separated from the reduction in the foreign exchange deposit reserve, the central bank also cut the overall reserve requirement ratio – the amount of cash that banks must have – on Monday. But the 25 basis point cut was below many analysts’ expectations.

Prime Minister Li Keqiang said on Monday at a meeting of the State Council, the supreme executive body, that the government should pay close attention to the economic consequences of unexpected domestic and foreign situations.

The PBOC said on Tuesday that it was aware of the recent volatility in the financial markets and would increase support for the economy with a prudent monetary policy. But the announcement did not increase the market mood much.

Shares in mainland China were higher on Wednesday, following an unstable trading day a day earlier, with major indices closing lower.

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