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.