The central bank is trying to slow down the weakening of the yuan against the US dollar

The Chinese yuan has weakened sharply against the US dollar in recent weeks as the dollar strengthens and investors worry about China’s economic growth.

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BEIJING – The Chinese yuan strengthened slightly against the US dollar on Wednesday, reversing a sharp weakening trend after the People̵[ads1]7;s Bank of China signaled support for the currency.

The yuan has fallen by around 3% this month as the US dollar strengthened, according to Wind Information. Prolonged Covid control and concerns about Chinese economic growth have also weakened sentiment on the yuan.

On Monday, PBOC announced that it would cut deposits by 1 percentage point to 8%, with effect from 15 May. The measure reduces the amount of foreign currency that banks need to hold, and theoretically reduces the amount of weakened pressure on the yuan.

“This move serves as a strong political signal [the] The PBOC is becoming uncomfortable with the rapid depreciation of the currency, Goldman Sachs analyst Maggie Wei and a team said in a report on Monday.

Analysts pointed out that the Chinese central bank last year increased the same foreign exchange reserve ratio twice to slow the rapid strengthening of the yuan.

Uncertainty remains high with Shanghai facing a prolonged shutdown and new local Covid cases increasing in Beijing.

“Looking ahead, we expect this RRR cut to slow down the CNY weakening in the short term, although it will also depend on the broad USD path and the general sentiment towards Chinese growth,” analysts said. “Uncertainty remains high with Shanghai facing a prolonged shutdown and new local Covid cases increasing in Beijing.”

On Wednesday, the PBOC set the yuan midpoint at 6.5598 against the dollar, the weakest solution since April 2021, according to FactSet data.

The US dollar has strengthened since the Federal Reserve began a cycle of monetary tightening and interest rate hikes. The US 10-year government bond yield has climbed to over three-year highs, and has erased a premium the Chinese 10-year government bond yield once had.

The Fed-related market movements have made US dollar-denominated assets relatively attractive to investors, while there is general unrest over the stance of China’s economic policy, Schelling Xie, senior analyst at Stansberry China, said on Tuesday. He expects the yuan to be on a weaker track, but said the pace is likely to slow.

The Chinese yuan is traded on land – on the mainland – and offshore, primarily in Hong Kong. The yuan can be traded within a range of 2% above or below a midpoint set daily by the PBOC based on recent market measures.

The offshore-traded yuan topped a psychological key level of 6.60 yuan against the dollar late Monday – the weakest since the fall of 2020, according to data from Wind.

From Wednesday afternoon, the offshore yuan remained slightly stronger, close to 6.58 against the dollar. The yuan on land was close to 6.55 yuan against the US dollar.

Morgan Stanley economists expect the yuan on land to trade close to 6.48 against the US dollar by the end of June.

“Overall, we believe that the PBOC will tolerate some orderly weakness in the CNY, as long as it is driven by the fundamentals,” the bank’s emerging market strategists said in a report on Monday. “But the USD / CNY may exceed [the target] in the short term given market volatility. “

Weak market sentiment

Mainland China’s primary stock indices in Shanghai and Shenzhen plunged Monday on the worst day since February 3, 2020 – in the early days of the pandemic’s first shock.

The capital, Beijing, began mass testing in the main business district on Monday, ordering people in a less hard-hit area to stay at home.

Shanghai, China’s largest city, has been under prolonged blockade for about a month with no clear end date in sight.

Despite a better-than-expected first-quarter GDP report last week, several investment banks cut their forecasts for China’s full-year GDP in light of recent virus outbreaks and Covid controls.

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Politicians have expressed support for growth in recent weeks, but markets remained more pessimistic.

“China’s political response has been mild and focused on the financial front,” Citi analysts said in a report late last week. “The authorities are clearly not resorting to old, pumping ways to unleash arbitrary influence to stimulate the economy.”

Separate from cuts in the foreign exchange deposit reserve, the central bank also cut the total reserve requirement – the amount of cash the banks need to keep – on Monday. But the 25-point reduction was below many analysts’ expectations.

Prime Minister Li Keqiang said on Monday at a meeting of the Prime Minister, the supreme executive body, that the government must place great emphasis on the economic effect of unexpected domestic and foreign situations.

PBOC said on Tuesday that they were aware of the recent volatility in the financial markets and wanted to increase support for the economy with prudent monetary policy. But the announcement did not increase market sentiment much.

Shares in mainland China were higher on Wednesday, following a volatile trading day the day before, with major indices closing lower.

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