(Bloomberg) — China raised its defenses against the yuan, moving its daily benchmark rate away from 16-year lows after strong verbal warnings.
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The People’s Bank of China said in a statement on Monday that the country’s financial regulators will take action to correct unilateral movements in the market when needed and ensure that the yuan remains fundamentally stable. That came hours after policymakers set a daily rate hike that was tighter than expected by a record margin, and government lenders were also seen actively selling dollars, traders said on condition of anonymity.
Adding fuel to the yuan’s recovery, China reported a stronger-than-expected credit expansion in August as lenders increased lending and the government accelerated bond sales.
“Foreign exchange market participants must voluntarily maintain a stable market,” the PBOC statement said. Disruptive behavior of market orders, such as speculative trading, should be decisively avoided.
The offshore yuan jumped about 1 percent, its highest since March, to around 7.27 per dollar.
“This, along with the correction and weaker dollar, should allay some fears that the yuan may suffer some renewed weakness last week,” said Eddie Cheng, senior market strategist at Crédit Agricole CBB in Hong Kong.
State-owned banks sold dollars in the morning session, which continued into the afternoon, traders said, speaking on condition of anonymity because they were not allowed to comment publicly. Then some lenders began unwinding high-dollar positions, triggering a wave of so-called stop orders, he said.
The offshore yuan fell dangerously close to the weaker end of the 2% fixed trading band against the dollar last week, weighed down by China’s increasingly upbeat economic outlook and interest-rate differentials with the US. Signs of easing factory inflation in August, positive press on credit growth and a rally in the yen against the dollar helped China’s currency.
Despite the PBOC’s efforts to support the yuan, many strategists argue that the central bank only wants to slow the pace of the decline and cannot do anything too drastic to reverse the weakening trend.
“If the yuan continues to depreciate, the central bank will have to take further action,” said Zhou Hao, chief economist at Guatai Junan in Hong Kong.
–With help from Qizi Sun and Ran Li.
(Includes merchant opinion.)
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