L'Opinion - - The Wall Street & I'Opi­nion - Sau­mya Vai­sham­payan and Mike Bird

tion pres­sure on the cur­ren­cy to de­ter tra­ders and in­ves­tors from ma­king bea­rish bets, ac­cor­ding to ana­lysts. That was so­me­times achie­ved by di­rec­ting state-ow­ned banks to pur­chase yuan off­shore.

The People’s Bank of Chi­na didn’t re­spond to a re­quest for com­ment.

The strength of the dol­lar, hi­gher ta­riffs on Chi­nese im­ports to the U.S., and slo­wer Chi­nese eco­no­mic growth have all wei­ghed on the yuan in recent months. While a wea­ker yuan could help off­set some trade pres­sure on Chi­nese ex­por­ters, it could al­so en­cou­rage Chi­nese re­si­dents and bu­si­nesses to place their ca­pi­tal abroad in­to sa­fer ha­vens, wea­ke­ning the cur­ren­cy fur­ther.

Ken Cheung, se­nior Asian cur­ren­cy stra­te­gist at Mi­zu­ho Bank in Hong Kong, said tigh­te­ning off­shore li­qui­di­ty is the most pa­la­table way for Chi­na’s cen­tral bank to stem the yuan’s slide, ra­ther than rat­che­ting up ca­pi­tal controls or di­rect­ly in­ter­ve­ning in the cur­ren­cy mar­ket.

“They’re just trying to be more subtle than they usual­ly are, using a small ham­mer ra­ther than a sled­ge­ham­mer,” said Mi­chael Eve­ry, se­nior Asia-Pa­ci­fic stra­te­gist at Ra­bo­bank.

While Chi­na needs a wea­ker cur­ren­cy, which could help boost ex­ports, it al­so wants sta­bi­li­ty, he said. “They’re al­so wor­ried about the U.S. res­ponse, the po­li­ti­cal as­pect of it,” he said.

The moves this week came af­ter the People’s Bank of Chi­na said Sun­day it would re­duce the amount of re­serves most com­mer­cial banks are re­qui­red to hold by 1 per­cen­tage point, freeing up 1.2 tril­lion yuan (al­most $175 bil­lion) of cash for banks to lend and help sup­port the Chi­nese eco­no­my.

It was the fourth time this year that Bei­jing lo­we­red the so-cal­led re­serve-re­qui­re­ment ra­tio for banks. Po­li­cy ma­kers have al­so cut in­come taxes and en­cou­ra­ged more in­fra­struc­ture spen­ding at the lo­cal le­vel to spur the eco­no­my.

The la­test mar­ket moves led some ana­lysts to ques­tion po­li­cy ma­kers’ com­mit­ment to pre­ven­ting the yuan from wea­ke­ning to 7 per dol­lar, a le­vel they have de­fen­ded at va­rious points in recent years.

The Chi­nese cur­ren­cy hasn’t brea­ched that le­vel in a de­cade. The wor­ry is that wea­ke­ning past that mark could re­ver­be­rate among Chi­nese re­si­dents and com­pa­nies, lea­ding them to send mo­ney off­shore. In 2016, the sharp de­pre­cia­tion of the yuan did exact­ly that.

“What the PBOC has chan­ged re­cent­ly in terms of its yuan po­li­cy is its to­le­rance of vo­la­ti­li­ty,” said Chi Lo, Grea­ter Chi­na eco­no­mist at BNP Pa­ri­bas As­set Ma­na­ge­ment.

“As long as there’s no di­sor­der­ly de­cline in the yuan, no mas­sive out­flows from Chi­na, the PBOC will to­le­rate fur­ther weak­ness,” he ad­ded.

Others argue that Chi­na could sim­ply main­tain or tigh­ten its ca­pi­tal controls to prevent cash from lea­ving the coun­try.

“One should not un­de­res­ti­mate the cen­tral bank’s re­solve in this mat­ter,” wrote Luc Luyet, cur­ren­cy stra­te­gist at Pic­tet Wealth Ma­na­ge­ment in a note to clients. “Chi­na has set tight ca­pi­tal controls in or­der to be able to pro­mote a so­ve­rei­gn mo­ne­ta­ry po­li­cy and a stable ex­change rate.” The yuan has de­pre­cia­ted most ra­pid­ly this year against the green­back, but it is al­so down against a bas­ket of cur­ren­cies. The yuan’s tra­de­weigh­ted in­dex has drop­ped by about 5.6 % since its May peak.

Bank of Ame­ri­ca and J.P. Mor­gan re­cent­ly re­vi­sed their fo­re­casts to re­flect more yuan weak­ness in the co­ming months, ci­ting es­ca­la­ting trade ten­sions and a di­ver­gence bet­ween U.S. and Chi­nese mo­ne­ta­ry po­li­cy.

The way Chi­na ma­nages its cur­ren­cy mat­ters glo­bal­ly. An unex­pec­ted de­va­lua­tion of the yuan in Au­gust 2015 sto­ked concerns about the pace of growth in the world’s se­cond lar­gest eco­no­my, fue­ling steel de­clines in com­mo­di­ty prices and U.S. stocks. The pres­sures on the yuan come ahead of the Trea­su­ry De­part­ment’s se­mian­nual re­port on the cur­ren­cy prac­tices of its tra­ding part­ners that could fur­ther raise ten­sions bet­ween the two coun­tries.

Mr. Trump has long main­tai­ned that Chi­na ma­ni­pu­lates its cur­ren­cy, kee­ping it de­li­be­ra­te­ly weak to gain an edge in glo­bal trade, even though the Trea­su­ry De­part­ment’s re­ports since his elec­tion ha­ven’t la­be­led Chi­na a cur­ren­cy ma­ni­pu­la­tor. In fact, in recent years, Chi­na has spent more of its ef­forts kee­ping the yuan from fal­ling too much.


Yi Gang, People’s Bank of Chi­na Go­ver­nor. The moves this week came af­ter the Bank said Sun­day it would re­duce the amount of the re­serves most com­mer­cial banks are re­quire to hold.

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