PBOC Seen Overriding Yuan Market Moves to Limit Depreciation

(Bloomberg) -- The yuan advanced the most in two weeks, with the central bank’s daily fixing adding to signs that China’s authorities are prepared to overrule the market to control the currency’s moves.

The People’s Bank of China strengthened its reference rate, which restricts onshore yuan moves to 2 percent on either side, even as the dollar advanced the most since July 5. This spurred speculation that the central bank isn’t sticking to its stated policy of following the direction of the market, which would have resulted in a weaker fixing.

“China does not want to see a rapid yuan depreciation, at least for now, because that would spur speculative traders to short the currency,” said Zhou Hao, an economist at Commerzbank AG in Singapore. “The yuan bears are all waiting for an opportunity to come. If the yuan weakens beyond 6.7 a dollar, it could reach 6.75 quickly, and we’ll start to see reports about it hitting 6.8.”

The Chinese currency climbed 0.21 percent to 6.6828 per dollar as of 4:11 p.m. in Shanghai, after dropping past 6.7 for the first time since 2010 on Monday. The yuan in Hong Kong’s offshore market advanced 0.37 percent to 6.6856. There’s a great deal of speculation that the authorities are preventing the exchange rate from slipping past 6.7, said Sue Trinh, Royal Bank of Canada’s Hong Kong-based head of Asian foreign-exchange strategy.

There have been increasing signs of PBOC intervention in recent days, with both the offshore and onshore exchange rates rapidly advancing in mid-afternoon trading Tuesday. Yuan borrowing costs surged in Hong Kong last week, pushing up the cost of betting against the Chinese currency. The overnight rate jumped to a record 66.8 percent in January as the PBOC mopped up yuan supplies, igniting market volatility around the world.

The Chinese currency has declined 2.8 percent this year, Asia’s biggest drop, on speculation policy makers were guiding depreciation against both the greenback and a trade-weighted gauge as they looked to boost exports and revive economic expansion. Things may be turning around, with data from gross domestic product to retail sales spurring optimism that growth will steady and that the monetary authority will refrain from aggressive easing.

The central bank is satisfied with the yuan’s decline so far this year and will curb depreciation to avoid exacerbating capital outflows, according to Svenska Handelsbanken, the currency’s most accurate forecaster tracked by Bloomberg over the last four quarters. The central bank raised the daily fixing by 0.04 percent to 6.6946 per dollar on Wednesday, after a gauge of dollar strength climbed 0.5 percent overnight.

“Our model showed the fixing should have been set weaker than 6.70 today, but it turned out to be stronger,” said Gao Qi, a strategist at Scotiabank. “The central bank could defend the 6.70 level to manage market expectation in the near term as the depreciation pressure on the yuan will remain in the rest of this year.”

To contact Bloomberg News staff for this story: Helen Sun in Shanghai at hsun30@bloomberg.net, Tian Chen in Beijing at tchen259@bloomberg.net. To contact the editors responsible for this story: Robin Ganguly at rganguly1@bloomberg.net.

With assistance from Tian Chen, Helen Sun