China’s Central Bank defends the Yuan


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The People’s Bank of China, the central bank of China, has once again raised the fixed yuan-dollar exchange rate by 0.86% to 6.1598 per dollar, which is 0.86% higher than the previous day’s price of 6.1170 per dollar on Tuesday afternoon in Beijing.

Image Source- CoinDesk

Taiwan — Experts claim that China’s central bank has made it obvious that it wants to stop the Chinese yuan from depreciating significantly against the dollar.

For the second time this year, the People’s Bank of China said on Monday that it would reduce the minimum amount of foreign currency that banks must hold.

The yuan has lost more than 8% of its value against the US dollar this year, reaching two-year lows. Theoretically, such steps would ease the downward pressure on the currency.

The yuan’s position in comparison to a currency basket, against which it has increased by 1% over the last three months, is frequently emphasised by Chinese officials.

However, a report published on Monday by Ting Lu, the senior China economist at Nomura, shows how critical the yuan-dollar exchange rate still remains in light of Beijing’s most recent actions.

They presented two arguments:

First, given the once-in-a-decade leadership transition and the escalating US-China tensions, Chinese officials are especially concerned about the RMB’s bilateral exchange rate with the USD. They feel that this rate somehow signifies relative economic and political strength.

Second, a sharp decrease in the value of the RMB relative to the USD might lower domestic morale and speed up capital flight.

In October, the Communist Party, which now controls China, will elect a new set of leaders, further solidifying President Xi Jinping’s position of power.

Tensions between the United States and China have increased over the past several years, leading to tariffs and restrictions against Chinese IT companies.

The last three years have seen a slowdown in China’s economic growth as a result of the pandemic shock in 2020. Due to this year’s stricter COVID measures, which included a two-month closure of Shanghai, several analysts have reduced their GDP predictions to about 3%.

The economic downturn has caused the yuan to drop, which would make Chinese goods more accessible to clients in the US and other countries.

This year, the U.S. Federal Reserve aggressively tightened monetary policy, which caused the value of the U.S. dollar to significantly rise.

Additionally, the euro and the yen have reached 20-year lows, which has benefited the dollar as seen by the U.S. dollar index.

levels to observe

In a study issued on Monday by Maggie Wei and colleagues at Goldman Sachs, the PBOC “may be willing to accept additional CNY depreciation versus the USD, particularly in light of the broad USD’s ongoing strength. However, if at all possible, they might want to avoid ongoing and excessive one-way depreciation.”

According to the analysts, the yuan would decline to 7 against the dollar during the next three months. The Nomura foreign exchange experts predict a level of 7.2 by the end of the year.

The yuan last traded at 7.2 to the dollar between May 2020 and September 2019, according to data from Wind Information.

Julian Evans-Pritchard, senior China economist at Capital Economics, stated on CNBC’s “Squawk Box Asia” on Tuesday that he “doesn’t expect it will go far above clearly sort of beyond the 7.2 that we saw during the trade war.”

I believe that threshold is the key, he retorted. ” They are hesitant to let that to happen because, in my opinion, if it climbs over that level, expectations for the value of the currency run the risk of being unanchored. There’s a good likelihood that your financial outflows will be significantly larger.

The PBOC fixed the midpoint of the yuan against the dollar on Tuesday at 6.9096, which is the lowest value since August 25, 2020, according to Wind Information. The Chinese central bank, which moderately controls the yuan, based its daily trading midpoint on current price levels.

Avoid placing a wager on a single issue.

A The PBOC’s foreign currency reserve ratio will next be reduced from 8% to 6% on September 15th, according to a statement issued on the central bank’s website on Monday.

Earlier in the day, Liu Guoqiang, the deputy governor of the PBOC, said that people “should not gamble on a single point” and that the short-term movement of the currency should be in two directions.

The text of Liu’s remarks during a press conference on economic policy reads as such in Chinese.

Liu persisted in backing Beijing’s long-term objectives of greater yuan usage abroad. He predicted that the yuan will keep rising in importance across the world.


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