An employee arranges genuine bundles of Chinese one-hundred yuan banknotes at the Counterfeit Notes Response Center of KEB Hana Bank in Seoul, South Korea. (Photographer: SeongJoon Cho/Bloomberg)

China's Yuan Steady After Central Bank Signals its Support

(Bloomberg) -- China’s yuan was stable in the onshore market following Friday’s surge, after the central bank signaled that it’s taking action to support the currency through its daily fixing.

Starting this month, banks resumed using an adjustment in the daily pricing of the currency against the dollar, known as the counter-cyclical factor, to mitigate the bias toward a weaker yuan, the People’s Bank of China said late Friday. The fixing has been consistently stronger than expected recently, according to Bloomberg surveys. China had suspended use of the factor in January.

The announcement adds to signs that China is pushing back against yuan declines, with the central bank this month boosting the cost to short the currency and urging lenders to prevent any “herd behavior” in the foreign-exchange market. The yuan’s drop of about 6 percent against the dollar over the past three months, more than any other Asian currency, raises the risk that the capital outflows seen in 2015-2016 will reappear.

China's Yuan Steady After Central Bank Signals its Support

"The move could end the one-way depreciation of the yuan and stabilize the currency in the near term, as the central bank clearly signaled its intention to keep the yuan stronger than the key psychological 7 per dollar level," said Ken Cheung, Hong Kong-based senior Asian currency strategist at Mizuho Bank Ltd.

By explicitly acknowledging the reactivation of the counter-cyclical factor, Chinese authorities are likely to "be more proactive in signaling their yuan guidance", Goldman Sachs economists led by MK Tang wrote in a note Saturday. "If the guidance were not heeded by the market, there might be follow-up policy actions to imprint the guidance on the market."

The PBOC said Friday that the factor “plays a positive role in keeping the yuan rate at a reasonable equilibrium level.” On Monday it set a stronger-than-expected reference rate for the 13th consecutive day. The onshore yuan was little changed at 6.8210 per dollar as of 5:10 p.m. in Shanghai, after jumping 0.8 percent on Friday. Stocks were higher, with the Shanghai Composite Index rising 1.9% and Hong Kong’s Hang Seng Index gaining 2.2%.

"The central bank’s statement to support the yuan has boosted market sentiment, which is the main reason for the rise of the stock market today," said Kang Chongli, a Beijing-based analyst with Lianxun Securities Co.

Pessimism about the yuan’s value against the greenback lingers, as a trade war between the world’s two biggest economies is primed to escalate after officials failed to make progress in two days of negotiations in Washington. A new round of tariffs could come as soon as early September, after the countries slapped import taxes on $50 billion of each other’s goods.

The renminbi, as the currency is officially called, has stoked the ire of President Donald Trump after a losing streak against the dollar of more than one month. Earlier this week, Trump rekindled his campaign accusations that Beijing is engaging in currency manipulation, long one of the most sensitive friction points between the two countries.

“Following the end of the U.S.-China trade talks this week, the resumption of the counter-cyclical factor to strengthen the yuan, or prevent further weakness, could be a gesture from the Chinese authorities to the U.S. side,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. in Singapore. Trump “has expressed his frustration at the weak yuan, and the subject of exchange rates was likely raised at this week’s meeting.”

©2018 Bloomberg L.P.