China takes aggressive steps in its latest battle to bolster yuan

Bloomberg

China took the most aggressive step yet in its latest battle to bolster the yuan, setting its reference rate for the currency with the second-strongest bias on record.
The People’s Bank of China (PBOC) fixed the yuan against the dollar at 249 pips stronger than the average estimate in a survey of market participants — which Bloomberg started compiling in 2018. Traders said at least one state-owned bank was also seen selling the greenback late in the afternoon, further helping to support the yuan.
China has stepped up its fight against a sliding currency in recent days as a hawkish Federal Reserve pushed up Treasury yields, threatening to lure more money out of the world’s second-largest economy. With the yuan acting as an anchor currency for others in Asia due to strong trade links, Beijing’s attempt to push back against dollar strength is also a signal it is reaching a pain threshold.
Outflows from China are likely to rise further due to its worsening yield disadvantage versus the US, said Zhaopeng Xing, a senior strategist at Australia & New Zealand Banking Group Ltd. in Shanghai. Monthly portfolio outflows may even increase to a level that offsets inflows from the trade of goods, he said. The currency is down about 8% this year in onshore markets.
The yuan rises 0.1% in onshore trading to 6.9004 per dollar as of 5:38 pm local time, erasing an earlier decline of 0.2%. With the currency ending the Beijing trading day stronger, Chinese banks could then submit quotes based on it for Wednesday’s fixing. Last-minute swings in the yuan often stoke speculation that there had been intervention.
Policy makers elsewhere have also acted to slow the decline in their currencies against the dollar. South Korea officials earlier this month jawboned markets, while Bank Indonesia said it wants foreign funds to buy its debt to bolster inflows. There is also growing speculation Japan may act to stop the yen from sliding past 140 per dollar.
Beijing’s concern about outflows was also demonstrated by the announcement of a consultation period for a new policy where companies must gain approval before selling long-term debt offshore.
In addition to being a victim of the surging dollar, the yuan has also declined in recent weeks as China reported disappointing economic data. Losses also quickened after the PBOC this month lowered a key policy rate to boost an economy battered by Covid restrictions.
The rate cut further widened the nation’s interest-rate discount to the US. The three-month interbank rate in China’s onshore market is currently lower than US dollar London interbank offered rate of the same tenor by 147 basis points, close to the widest since 2007.
Beijing is likely to endeavor to keep the yuan and the financial markets stable in coming months as the country prepares for a twice-a-decade party reshuffle later this year.
“Efforts to support the yuan could be paramount to retain a semblance of stability especially in a weak macro environment where bearish foreign currency bets tend to snowball,” said Fiona Lim, a senior foreign-exchange strategist at Malayan Banking Bhd In Singapore.