China targets renminbi bears with most forceful fixing guidance ever

HONG KONG – China delivered its strongest-ever pushback against a weaker renminbi via its daily reference rate for the managed currency, as it sought to restore confidence to a market spooked by disappointing data and

heightened credit risks.

The People’s Bank of China (PBOC) set its so-called fixing at 7.2006 per US dollar compared with an average estimate of 7.3047 in a Bloomberg survey with traders and analysts. This was the largest gap to estimates since the poll was initiated in 2018.

The authorities have been escalating their support for the embattled renminbi over the past week, only to see it sinking in both onshore and overseas markets towards multi-year lows. This week, they told state-owned banks to step up intervention, according to people familiar with the matter, and the central bank said on Thursday it will resolutely prevent excessive currency moves.

For years, policymakers have been highly sensitive to any wild renminbi swings, which could reignite the speculative attacks that accompanied the shock devaluation eight years ago. When bearish sentiment is at an extreme level, a direction the market is heading towards right now, China is at risk of a vicious circle of capital outflows and even sharper depreciation.

To nip such a crisis in its bud, the PBOC tends to start by managing the renminbi tightly with the fixing, which limits the currency’s daily moves by 2 per cent on either side. If bears refuse to hit the exit, the central bank can opt to deploy more aggressive tools.

Those measures include injecting dollar liquidity, elevating the cost of putting on short-renminbi trades in the forwards market or even engineering a shortage of the Chinese currency in Hong Kong.

“As the dollar-yuan pair is already around a historically high level, while the confidence level is particularly weak with rising debt concerns, it’s important for the PBOC to step up its measures to stabilise the yuan,” said Ms Zhi Xiaojia, head of research at Credit Agricole CIB. “Rapid yuan depreciation could also further dampen confidence and weigh on risk sentiment.”

After Friday’s fixing, the onshore renminbi advanced about 0.1 per cent, while the currency gained by a similar magnitude overseas to 7.30 per dollar. The reference rate was also set at a stronger level to the previous day for the first time in six sessions.

Bloomberg’s daily survey on the fixing, which is closely watched by investors as a gauge of market expectations for the currency, was conducted with nine traders and analysts on Friday morning. The PBOC’s reading was stronger than all but one prediction collected in the poll.

On top of requesting more intervention this week, the Chinese authorities also asked banks to check if local corporates are speculating on one-way moves in the renminbi, people familiar with the matter said. This request came as the offshore renminbi fell towards 7.35, a level that top leadership has been paying close attention to, the people said.

“Going ahead, further measures such as a potential cut to the foreign exchange reserve requirement ratio following the PBOC’s pledge to prevent overshooting may prompt yuan bears to trim their short position,” said Mr Ken Cheung, chief Asian foreign exchange strategist at Mizuho Bank in Hong Kong.

While the renminbi has edged off its lows, analysts say it will still face pressure in the long term due to the nation’s sluggish growth and monetary policy divergence with the United States. The gap between the yield on China’s 10-year bonds and their US counterparts remained near the widest since 2007, favouring American assets in the eyes of investors.

Underwhelming economic data in retail sales and housing prices – coupled with a spreading crisis in the property sector – is also keeping investors from the renminbi. PBOC rate cuts to stimulate growth have added even more stress.

“The authorities are preparing to draw a line in the sand and defend the currency from further weakness,” said ANZ head of Asia research Khoon Goh. “But for a more sustained rebound in the yuan, we really need to see US 10-year bond yields come down from current high levels.” BLOOMBERG