In recent developments, China’s central bank has intensified its scrutiny of bulk dollar purchases by domestic firms
signaling a significant shift in its currency policy. This move comes at a time when the Chinese currency, the yuan, is facing mounting depreciation pressure. In this article, we will delve into the details of this development, its implications for businesses
and the broader context of China’s currency policy.
The Yuan’s Depreciation Woes
China’s central bank, known as the People’s Bank of China (PBOC)
has taken a decisive step to address the ongoing depreciation of the yuan. Companies seeking to purchase $50 million or more in foreign currency will now be required to obtain approval from the PBOC. This is a significant departure from previous policies and reflects the central bank’s growing concern about the yuan’s weakening value.
“The approval process will be extended,” said one of the sources
highlighting the tightening of controls on large-scale dollar purchases by Chinese firms.
China’s Central Bank Currency Depreciation Concerns
The recent depreciation of the yuan has raised alarm bells in China’s financial sector. The currency has depreciated by approximately 6% against the U.S. dollar within the current year alone. Such a significant depreciation has not been witnessed since the 2008 global financial crisis. This depreciation trend has prompted concerns that the yuan may weaken even further, possibly surpassing the critical threshold of 7.5 yuan per U.S. dollar.
China’s Central Bank Warning to Lenders
In response to the depreciating yuan, the People’s Bank of China has issued warnings to some lenders regarding their substantial dollar purchases on behalf of corporate clients. This move underscores the central bank’s determination to curb the excessive demand for foreign currency.
Yuan Stabilization Efforts
To counter the depreciation of the yuan, the Chinese central bank has implemented several measures. It has consistently set the midpoint fixings for the yuan at levels stronger than market expectations. Additionally, the central bank announced plans to increase the supply of dollars by reducing the amount of foreign exchange that banks are required to set aside. These measures are aimed at stabilizing the currency and preventing further depreciation.
State-Owned Banks Enter the Fray
In parallel with the central bank’s efforts, state-owned banks have entered the foreign exchange market. They have observed selling dollars in both onshore and offshore markets while absorbing yuan liquidity in offshore foreign exchange markets. This strategy designed to increase the cost of shorting the yuan, discouraging speculative bets against the Chinese currency.
China’s Central Bank Regulatory Commitment
China’s foreign exchange self-regulatory body has also made a commitment to safeguarding the yuan’s stability. It pledged to take necessary actions to correct one-sided and pro-cyclical activities that could lead to an overshooting of the yuan’s depreciation. This commitment underscores the Chinese government’s dedication to ensuring the stability of its currency.
In conclusion, China’s central bank’s decision to tighten scrutiny on bulk dollar purchases by domestic firms reflects its growing concern over the depreciation of the yuan. This move is part of a broader effort to stabilize the currency and prevent it from weakening further. While the yuan’s depreciation has raised concerns, China’s regulatory bodies are actively taking measures to mitigate the risks associated with currency devaluation.
FAQs
- Why is China’s central bank tightening scrutiny on dollar purchases?
- China’s central bank is concerned about the depreciation of the yuan and aims to control excessive demand for foreign currency to stabilize the yuan’s value.
- How much money do companies need approval for when purchasing dollars?
- Companies seeking to purchase $50 million or more in foreign currency now require approval from the People’s Bank of China.
- What is the current depreciation rate of the yuan against the U.S. dollar?
- The yuan has depreciated by approximately 6% against the U.S. dollar within the current year.
- What measures has the Chinese central bank taken to stabilize the yuan?
- The central bank has consistently set midpoint fixings for the yuan at stronger levels than market expectations and plans to increase the supply of dollars to stabilize the currency.
- How are state-owned banks contributing to yuan stabilization efforts?
- State-owned banks are selling dollars in the foreign exchange market and absorbing yuan liquidity to raise the cost of shorting the Chinese currency.