In an attempt to stabilize a rapidly declining yuan, China's monetary authorities implemented stringent measures on Tuesday, marking the first such intervention in nearly eight months. As per market sources, the People's Bank of China (PBOC) established a higher-than-anticipated trading range for the yuan and state banks engaged in dollar sales, demonstrating an increased concern over the yuan's swift depreciation.
In recent months, flagging consumer confidence and a floundering real estate market have undermined the post-pandemic recovery, contributing to the yuan's approximately 4% slide against the dollar. However, these forceful interventions managed to result in a 0.4% rebound for the yuan on Tuesday, its largest gain in almost two weeks.
Moh Siong Sim, a currency strategist at the Bank of Singapore, noted, "There is weariness that the yuan weakness may have got to the point where the currency weakness could affect confidence that in turn fuels currency weakness." He added that Chinese authorities are now signaling a greater discomfort with the yuan's declining value and are attempting to decelerate the drop.
The monetary intervention comes amidst a diminishing investor interest in China due to signs of the nation's economic recovery faltering. Yet, the weaker recovery has spurred predictions of increased stimulus measures to alleviate economic concerns, a sentiment that even mainland officials have begun to echo.
Speaking at a World Economic Forum summit in Tianjin, Premier Li Qiang stated that China would act to stimulate demand and energize markets, although he didn't elaborate on specific strategies.
Despite the PBOC's efforts to manage the yuan's trajectory, analysts are skeptical about the prospect of completely halting its decline due to the grim economic forecast. Wall Street's JPMorgan bank maintained its "bearish" stance on China's yuan, predicting further interventions by the central bank.
Japan shares China's apprehension regarding its currency's downward trend, mainly due to major economies' hawkish monetary policies causing widened yield differentials.
On Monday, the yuan fell to a seven-month low but managed to rally to 7.2058 per dollar on Tuesday. State banks played a pivotal role in this recovery by purchasing yuan in the offshore spot market, especially when the currency neared the significant 7.25 per dollar level.
"What could really stabilize the Chinese currency is... they probably need to stabilize the growth expectations. There is a need to address that worry," Sim suggested. Analysts anticipate further efforts to halt the yuan's decline, potentially involving measures to encourage capital inflows.
Rob Carnell, ING's regional head of research, Asia-Pacific, highlighted the need for both stimulus and efforts to stabilize yields to prevent the yuan from falling further. He said, "We've got to be thinking about the likelihood of further easing ahead...That's got to keep yuan on the back foot."
