Chinese Central Bank Says It Will Prioritize Stabilizing Currency After Yuan Plunges to 14-Year Low Versus USD – Recently, the onshore exchange rate of the Chinese yuan against the U.S. dollar plummeted to 7.2458 per dollar, the lowest level since January 2008. The most recent decline in the yuan occurred just days after the exchange rate between the two currencies surpassed 1:7. Since that date, 15 September 2022, the yuan has depreciated by more than 3 percent.
Since the beginning of the year, the Chinese yuan has lost more than 12% of its value against the U.S. dollar. A report from Reuters says that the Chinese yuan has been struggling against the dollar, just like other currencies around the world, ever since the U.S. Federal Reserve gradually started raising interest rates.
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The U.S. Federal Reserve is raising interest rates as a way to bring down the country’s inflation rate, which peaked at 9.1% in June 2022. But after the yuan fell to its lowest exchange rate in more than 14 years, the People’s Bank of China (PBOC) is said to have said that stabilizing the yuan is now its top priority.
In addition to reassuring the markets, the PBOC also warned those who bet against the yuan that they might have to pay for it. The PBOC reportedly stated: “Do not bet on one-way appreciation or depreciation of the yuan, as losses will definitely be incurred in the long term.”
Instead of betting against the currency, the central bank urged players in the currency markets to “voluntarily safeguard the stability of the market, and be firm when they need to iron out big rallies or declines in the exchange rate.” According to a report from Bloomberg, the Chinese central bank’s warning is for corporates that are being accused of speculating against the yuan. The warning is also meant for financial institutions that may be breaking the rules of the country.
Before the yuan fell on September 28, the POBC reportedly let it be known that it wanted to “dampen speculative demand” by putting a risk reserve requirement ratio (RRRR) of 20% on financial institutions that bought foreign exchange through currency forwards.
Analysts from Goldman Sachs were quoted in a report in the South China Morning Post as saying that the PBOC hoped that raising the RRRR would slow down the devaluation of the yuan before the 20th Congress of the Chinese Communist Party.
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In the meantime, Grant Wilson, a senior adviser at Exante Data, a macro advisory and data analytics firm, said in a recent op-ed that the Chinese government may have already helped the yuan in secret. But since the intervention is done secretly, it only shows up “on the balance sheet of China’s state banks as net foreign currency assets, rather than in the PBOC’s official reserves.”
Wilson stated that the Chinese government is intervening in this manner to limit the yuan’s gain while supporting exports. Another reason Chinese monetary officials may have chosen to interfere secretly is the risk of being dubbed a currency manipulator. “The stability of official reserves ensures that China does not meet one of three criteria used by the U.S. Treasury to label a country a currency manipulator,” explained Wilson.
