PBC fires warning shot
▶ Issuance can deter speculators, maintain stability: analysts
A decision by China’s central bank to sell tens of billions worth of yuan bills in Hong Kong could serve as a warning shot to foreign speculators, who have been betting on the Chinese currency to fall past what has become known as a crucial psychological level of 7 yuan per dollar, analysts said on Thursday.
While the move, which is the first of its kind, aims to stabilize the yuan’s offshore exchange rate against the US dollar and highlight China’s many tools to keep the currency from weakening, the People’s Bank of China (PBC), the central bank, will not be too concerned about the artificially imposed number, analysts noted.
With the market watching the PBC closely following the recent slide in the yuan’s exchange rate against the greenback, the central bank announced on Wednesday that it would auction a total of 20 billion yuan ($2.87 billion) worth of bills in Hong Kong starting on November 7. It includes 10 billion yuan in three-month bills and 10 billion yuan in one-year bills.
“This is a very significant move from the central bank because it serves several different purposes,” Li Daxiao, chief economist at Shenzhen-based Yingda Securities, told the Global Times.
It could serve as a warning shot for speculators who are seeking to short the yuan, while also maintaining the Chinese currency’s liquidity in the offshore market and better guiding market expectations, which have been focused on the yuan falling past the 7 yuan per dollar point, Li said, adding that the issuance of the bills could increase the cost of shorting the yuan.
The move is also in line with comments made by Pan Gongsheng, deputy governor of the PBC, last week, in which he warned “forces trying to short the yuan” that China has the experience and policy tools to take “necessary and targeted measures.”
“We have the foundations, the ability and the confidence to keep the yuan’s exchange rate stable at a reasonable and balanced level,” Pan told a press briefing on Friday. He stressed that the yuan’s exchange rate is stable against the dollar compared to other emerging currencies, but avoided commenting on the 7 yuan per dollar level.
The exchange rate has been hovering near the 7 yuan per dollar level in recent weeks, prompting many to speculate about a further slide unless the PBC moved to defend the Chinese currency.
No need for concern
However, analysts insisted that the PBC does not need to focus on keeping the yuan away from an artificially imposed level; rather it should focus on market reforms and maintaining sufficient liquidity, they said.
“This so-called psychologically important level has no written rules or standard; therefore, it does not mean much,” said Liu Xuezhi, a senior macroeconomics expert at Bank of Communications. “So from the PBC’s perspective, it is not necessary to defend against something that is so fluid.”
However, if the currency slid past 7 yuan per dollar and there was further severe depreciation, then the PBC would definitely step in, and “there is no doubt the central bank has many tools at its disposal,” Liu told the Global Times on Thursday, noting that keeping the yuan steady is in the interests both of China and its trading partners.
“For now, at least in the eyes of the authorities, the yuan is stable and there is no need to take any drastic measures,” he said.
“This so-called psychologically important level has no written rules or standard; therefore, it does not mean much.”
Liu Xuezhi
Senior macroeconomics expert at Bank of Communications