In its latest effort to prop up the faltering yuan, the People’s Bank of China (PBOC) met on Sept. 11 to discuss how to stop the yuan’s rapid slide and arrest speculation, and it promised to maintain a stable exchange rate.
Experts, however, believe that despite the talking up, the currency is slated to weaken further over the next three months, and PBOC measures are unlikely to bring about a lasting turnaround.
“We will not hesitate on taking actions when necessary to firmly correct the one-sided and pro-cyclical market moves, to resolutely address the actions which disturb market order, and to unswervingly avoid the overshooting risks in the exchange rate,” the PBOC, the foreign exchange regulator, said in a statement after the meeting.
Financial regulators have the ability, confidence, and conditions to keep the yuan’s exchange rate stable, the statement added.
On Monday, the PBOC also fixed the yuan at 7.2148 per dollar, which is an improvement from the previous week’s fixing of 7.3437. The yuan is now permitted to move up or down by a range of 2 percent versus the U.S. dollar.
A Weak Yuan
Indeed, the yuan has been under relentless pressure against the dollar, reaching a 16-year low of 7.351 shortly before the PBOC meeting on Monday. The PBOC announcement pushed the yuan to 7.2934 that day. Yet, while the yuan has stayed resilient since then—opening at 7.28 on Sept. 13—it is still very close to its lowest level, according to CE.
“The risk is further yuan weakness,” Gary Dugan—the chief investment officer at Dalma Capital and a foreign investor in China—told The Epoch Times. One of the reasons for that is ”the seeming reluctance of the Chinese leadership to provide a sufficient stimulus to the economy to encourage investors to believe that growth is on track to get back to the government’s target of 5 percent,” he added.
While a slowing Chinese economy suggests the PBOC is likely to lower interest rates further—adding to the yuan’s weakness—another worry is the likelihood of an increase in U.S. interest rates.
“There remains the fear that the Federal Reserve will need to increase interest rates still further to slow the U.S. economy and bring inflation under better control. A central bank (the Fed) that is fighting inflation with high interest rates, and Chinese authorities more minded to running very loose monetary policy will put continuing downward pressure on the yuan,” Mr. Dugan said.
“Typically, a rise in U.S. interest rate drives the shift of emerging market currencies to the U.S. dollar (resulting in their weaknesses),” Nirgunan Tiruchelvam, head of Equity Research at Hong Kong-based Alētheia Capital, told The Epoch Times.
Hence, until the Fed ends its (interest rate) tightening cycle and turns to rate cuts next year, the CE note said any intervention in the foreign exchange market by the PBOC is unlikely to provide more than short-term relief for the yuan.
Nevertheless, the PBOC also played up China’s economic prospects on Monday to shore up the world’s second-largest economy and stabilize market expectations.
“The consumer price index rebounded to the positive range year on year, trade was better than expected, property policies are gradually taking effect, consumption has recovered significantly, and the country is seeing breakthroughs in sci-tech and innovation,” said the central bank statement. “Economic improvement is gaining momentum, which offers a solid footing for the yuan to be basically stable at a reasonably balanced level.”
According to Mr. Tiruchelvam, a weaker yuan is not bad for the Chinese economy since it could help growth by boosting more competitive exports.
“However, weakness in yuan that appears out of control or reflect[s] a loss of confidence in policymakers’ actions could be problematic,” Mr. Dugan warned.
