PBOC Warns Against One-Way Yuan Bets After Rally to 6-Year High

(Bloomberg) -- China’s central bank is asking financial institutions and enterprises to step up exchange-rate risk management and refrain from making one-way bet on the yuan after the currency climbed to a six-year high against a basket of peers.

Volatility of the Chinese currency may increase in the future as overseas central banks have started adjusting their monetary policies, with two-way fluctuation of the yuan rate expected to be “the norm”, according to a statement posted on the website of the People’s Bank of China. 

“In the future, the renminbi (yuan) exchange rate may either appreciate or depreciate,” said the statement, which is about a meeting held this week by China Foreign Exchange Committee, an industry body whose members include representatives from regulatory bodies and financial institutions. 

Deputy Central Bank Governor Liu Guoqiang also attended the meeting, a senior-level forum sponsored by the nation’s central bank and its top forex regulator. The last time the group met was in May, days before PBOC raised the amount of foreign currencies banks must hold as reserves for the first time in more than a decade. The hike curbed the yuan’s rally then.

The latest warning came as the yuan advanced to its highest level since 2015 against a basket of trading partners’ currencies earlier this week following the dollar’s surge. The rally is fueled by China’s trade surplus and prospects of cuts in U.S. tariffs, analysts have said.

The PBOC set the daily yuan fixing rate at 6.3825 on Friday, roughly in line with the 6.3822 average estimate by analysts and traders surveyed by Bloomberg. Offshore yuan was little changed at 6.3853 as of 11:35 a.m. in Shanghai.

“The warnings from the FX regulator are something the market should take seriously,” said Zhou Hao, a senior emerging market economist at Commerzbank AG. “Under any circumstance, the risk of the one-way market is that the unwinding, once it happens, could be wild.”

Qi Gao, Asia FX strategist at Scotiabank, wrote in a note that China’s central bank will set the yuan reference rate against the greenback “with an upward bias” if needed to prevent any one-sided speculation on the yuan appreciation. That said, he maintains his forecast that the dollar/yuan pair could move toward 6.35.

Shenzhen-based China Merchants Securities said in a research note that the yuan appreciation is bringing much more benefits to the Chinese economy than detriments and the foreign exchange market players should prepare for mid- to long-term yuan appreciation as dollar may still weaken. 

The official statement, also published in the front page of the PBOC-backed newspaper Financial News on Friday, noted that the yuan exchange rate is affected by “many” factors as the the current global economic and financial situation is “complex and volatile”.

“Only by adhering to the concept of risk neutrality, can enterprises, financial institutions and other market subjects better deal with external shocks,” it said, adding that financial institutions should refrain from speculative activities or help enterprises speculate in the foreign exchange market.

©2021 Bloomberg L.P.

With assistance from Bloomberg