China Used Strategic in recent months, demonstrated a nuanced approach to stabilize its currency, the yuan, deviating from the official interventions seen in 2015. Rather than resorting to massive foreign exchange reserves to bolster the yuan, the People’s Bank of China (PBOC) adopted a strategy of moral suasion, providing market guidance and orchestrating buying by state banks.
China Used Strategic Shift in Approach
The PBOC’s current strategy reflects a departure from the tactics employed in 2015 when official intervention involved burning $1 trillion in reserves. This time, the central bank opted for moral suasion, signaling to the markets the type of selling pressure it would resist. In a series of coordinated actions, regulators steered market participants away from strong downward pressure on the yuan.
China Used Strategic Actions to Resist Downward Pressure
Interviews with 28 market participants revealed at least two dozen instances where regulators closely guided and steered market participants to counteract strong downward pressure on the yuan. The PBOC and the State Administration of Foreign Exchange (SAFE), the currency regulator, have not directly commented on their approach.
This strategy, described by market participants and analysts, has effectively prevented a destabilizing slide in the yuan. However, it has also led to a significant impact on China’s foreign exchange market, resulting in plummeting trading volumes and raising questions about the yuan’s potential as a global reserve currency.
Midpoint Deviations as Warning Signs
Key warnings emerged in June when the PBOC’s daily yuan guidance, known as the midpoint, started diverging significantly from market expectations. While the midpoint is typically based on contributions from 14 banks and referenced to the previous day’s trade, its deviation signaled the PBOC’s intention to counter market-driven depreciation.
By August, the yawning gap between the midpoint and trader estimates became a clear indication that the PBOC was actively steering the yuan away from the direction the market was pushing it.
Strategic Buying by State-Owned Banks
Unlike the extensive official intervention in 2015, this time, the PBOC employed more targeted and specific directions to banks and market participants. State-owned banks discreetly stepped in as buyers whenever the market momentum seemed against the yuan. This buying activity often occurred around psychologically significant currency levels, aiming to contain volatility.
Traders reported instances in late May and December when state banks intensified yuan buying after the currency hit its lowest points. However, the specific size of these buying activities and whether they were directed by the central bank remains unconfirmed.
Managing Exporter Currency Holdings
Regulators also focused on monitoring exporters’ foreign exchange buying and selling plans, given their substantial currency holdings and significant influence on yuan movements. Banks received surveys and weekly queries about exporter customers’ intentions, indicating heightened scrutiny and guidance from regulatory authorities.
While these measures have stabilized the yuan above its 16-year low reached in September, they have also led to a significant reduction in onshore yuan trading volumes. Analysts suggest that the central bank’s efforts, while effective in stabilizing the currency, have also chilled the market.
The Path Forward
As China grapples with both domestic and global macroeconomic factors, the PBOC’s use of “non-standard measures” to intervene in foreign exchange markets is seen as a strategic move to prevent rapid depreciation. The ongoing balancing act underscores the complexity of China’s economic challenges and its efforts to thwart decoupling, particularly in the face of Western initiatives to reduce economic reliance on China.
For now, the yuan remains stabilized, but the market’s cautious approach and reduced trading volumes reflect the uncertainties introduced by the PBOC’s strategic interventions. As China navigates its currency through global economic shifts, the financial landscape awaits further developments and adaptations in response to evolving market dynamics.
FAQs
- How did China’s approach to stabilizing the yuan in 2022 differ from its strategy in 2015?
- In 2022, China adopted moral suasion, providing market guidance and orchestrating buying by state banks, deviating from the massive official interventions seen in 2015.
- What were the key warnings that emerged regarding the yuan’s stability?
- Key warnings emerged when the PBOC’s daily yuan guidance, known as the midpoint, started deviating significantly from market expectations, signaling the central bank’s intention to counter market-driven depreciation.
- How did state-owned banks contribute to stabilizing the yuan?
- State-owned banks discreetly became buyers whenever market momentum seemed against the yuan, particularly around psychologically significant currency levels, aiming to contain volatility.
- What impact did the PBOC’s strategy have on onshore yuan trading volumes?
- The central bank’s efforts, while effective in stabilizing the yuan, led to a significant reduction in onshore yuan trading volumes, reflecting market caution and uncertainties.
- What does the PBOC’s use of “non-standard measures” indicate about its approach to foreign exchange markets?
- The use of “non-standard measures” is seen as a strategic move to prevent rapid depreciation, reflecting the complexity of China’s economic challenges and efforts to thwart decoupling.