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June Could Be the Cruelest Month for China’s Yuan

June Could Be the Cruelest Month for China’s Yuan

(Bloomberg Opinion) -- If May felt like a bruising month for the Chinese yuan, just wait for June. It promises to be a roller coaster.

The Chinese currency is down about 2.6% this month, the worst performer in Asia and heading for its biggest drop since July. This is despite stern words from Guo Shuqing, chairman of China’s banking regulator and party secretary of the People’s Bank of China, who warned last week that speculators “shorting the yuan will inevitably suffer from a huge loss.” 

June Could Be the Cruelest Month for China’s Yuan

While the central bank’s big shots are showing confidence now, next month will prove even trickier. Ahead of the G-20 summit on June 28, China’s top bureaucrats will have to decide if they have the stomach for austerity. The PBOC’s every move, from daily open-market operations to bad bank cleanups, will be watched carefully. If the central bank conducts large-scale liquidity injections to shore up the economy, it will push down onshore interest rates, weakening the yuan.

It will be a busy month in any case. A 463 billion yuan ($67 billion) medium-term lending facility is due on June 6, followed by a further 200 billion yuan on June 19. That’s the most in at least two years. To ease liquidity for banks, the PBOC may have to cut the required reserve ratio again, Bank of America Merrill Lynch says. 

June Could Be the Cruelest Month for China’s Yuan

It may also have to pump more money into the financial system to bolster confidence. China’s economy lost steam again in April, with industrial profits falling. Many placed the blame on the central bank, which tightened liquidity in late March and early April by skipping open-market operations for 15 straight days. The PBOC tends to open the taps if the official Purchasing Managers’ Index falls below 50, or if quarterly industrial profits contract.

To be sure, 7 isn’t a magic number, and the yuan is still 16% overvalued using nominal effective exchange rate indexes maintained by the Bank for International Settlements. But China needs to convey clearly that it’s not trying to use the yuan as a trade negotiation tool, and that it has grasped the art of managing financial distress.

It’s the last point that worries traders. Last weekend, the government carried out China’s first bank seizure since 1998. The PBOC took over Baoshang Bank, a small lender based in Inner Mongolia that’s been on regulators’ radar since 2013. The bank has roughly $3.5 billion of negotiable certificates of deposit due in May and June. That’s not an elevated level for Baoshang, but speculation that it had run into trouble with refinancing and that large creditors would not be paid back in full drove up interbank rates. That prompted the central bank to give the market an emergency shot of liquidity via seven-day reverse repos.

June Could Be the Cruelest Month for China’s Yuan

China’s regulators have long vowed to clean up troubled banks, but why do so during a period of heightened market volatility? The timing can only fuel concerns of contagion risk or other skeletons in the cupboard that prompted officials to act. Whatever the explanation, it can’t be good news for the yuan.

There’s also the question of who is the real heir to former PBOC Governor Zhou Xiaochuan, who held undisputed sway over the central bank’s position on monetary matters. It’s disturbing that the official quoted on every front-page editorial in state media this week owes his authority to his party position. Is the yuan a monetary issue or a political question?

Traders say sell in May and go away. Those with an interest in the yuan should postpone their summer holidays and stay home. 

--With data assistance from Ailing Tan.

To contact the editor responsible for this story: Matthew Brooker at

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

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