China Sets Weaker Yuan Fix in First Sign Record Rally May Slow

(Bloomberg) -- China set its daily yuan fixing at a weaker-than-expected level, the first signal that policy makers may want to rein in this quarter’s rapid appreciation.

The People’s Bank of China’s reference rate was set at 6.7872 on Tuesday, after the spot rate fell 0.51% overnight. That’s almost 60 basis points weaker than the average estimate in a Bloomberg survey, the largest gap in about two months.

China’s currency has been rallying on a slumping dollar, signs the economy is recovering from the virus pandemic, a rate premium over the U.S. and optimism the nation’s debt will be added to global indexes. The yuan could rise to 6.7 within a month, Tommy Xie, an economist at Oversea Chinese Banking Corp. It was up 0.3% to 6.7841 per dollar as of 5:35 p.m. in Shanghai.

“The market is growing increasingly concerned that the PBOC will guide the yuan weaker due to the rapid rally in the currency recently,” Xie said. “We need to see a few more days’ fixings to see if the central bank can no longer tolerate the advance. Right now, investors still like to long the yuan given the strong fundamentals.”

The yuan was on track for its biggest ever quarterly gain in Bloomberg data going back to 1981, before a rebound in the greenback triggered a three-day retreat. The PBOC had helped the rally by not standing in its way, which for some in the market was an incentive for the currency to push higher. It is still up 4.1% since the end of June.

China’s yield premium over the U.S., which is near the largest in more than a decade, could help attract “persistent and large” fund inflows, Citigroup Inc. said in a note dated Monday. And that may become a headache for policy makers because it risks stoking asset bubbles, prompting Beijing to slow the yuan’s appreciation by relaxing capital controls and to reduce interest rates.

“The yuan could be pushed to a one-way appreciation path, and certain inflows could be diverted to higher return and more speculative sectors,” Citi economists led by Li-gang Liu wrote. “Thus, we may see a paradoxical condition that the high interest rate policy is associated with a bigger asset bubble in housing and equity markets.”

Beijing’s relatively hands-off approach during the rally is a far cry from a few years ago, when the PBOC sought to rein in gains over fears that they would hurt exporters. What’s different now is China has changed its strategy for boosting growth, focusing on cheapening imports and bolstering domestic consumption.

The fixing limits the yuan’s move to 2% in either direction.

©2020 Bloomberg L.P.