(Bloomberg) China indicated it would allow the yuan to fall against the dollar as a surge in capital outflows and a strong dollar pressured the People’s Bank of China to ease monetary tightening.
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The People’s Bank of China cut the yuan’s daily reference rate to its lowest since January, after the currency fell in the spot market this week as investors shunned yuan-denominated assets for higher-yielding assets, raising expectations the dollar would continue to strengthen.
The PBOC’s adjustments to so-called fixed interest rates, although modest so far, could provide important clues for the market. This is an indication that the Chinese government may be willing to end the pattern of supporting the yuan by keeping the benchmark interest rate mostly stable. The move will have far-reaching implications, as China’s currency is seen as a pillar of stability for countries in the region.
“The PBOC may be allowing a bit more room for the dollar/yuan to rise as the dollar is likely to remain strong for a bit longer,” said Fiona Lim, senior strategist at Malayan Banking Co. But the exchange rate remains stronger than expected, signaling the PBOC’s desire to limit the yuan’s depreciation, she said.
Chinese authorities have kept the yuan firm for much of this year and favored the dollar, citing China’s weak economy and a wide interest rate differential with the U.S. Worsening capital outflows have also weighed on the currency, with domestic companies surging in foreign currency purchases and exporters hoarding dollars.
The People’s Bank of China faces a constant battle to find the right pace of depreciation to support growth without sparking market panic and capital outflows. A former Chinese official said last week that China should loosen its grip on the yuan, saying the focus on keeping it stable limits the room for monetary stimulus.
The People’s Bank of China lowered its fixed interest rate to 7.1098 to the dollar on Thursday. There was little change in the renminbi in both domestic and overseas markets.
The dollar edged lower after gaining on Wednesday as traders lowered expectations of a rate cut after Federal Reserve meeting minutes showed some officials questioned whether policy was tight enough.
“This weaker correction is consistent with the dollar’s recovery. This is a continuation of a more flexible acceptance of the renminbi,” said Koon Goh, head of Asia research at ANZ Group Holdings.
–With assistance from Qizi Sun and Tania Chen.
(Will be updated throughout.)
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