China tightens grip on yuan to head off risks

beijing —In rapid fire moves that have stunned investors, Chinese authorities have begun tightening control over the yuan, lifting it sharply in a concerted effort to restore market confidence and forestall risks of capital outflows and slower growth, policy insiders say.

Caught off-guard last month by a ratings downgrade by Moody’s Investors Service that gave fresh momentum to bearish yuan bets, traders said Beijing has reverted to its old play book — intervening in markets to bend them to its will.

The key priority for authorities was maintaining market confidence ahead of a leadership transition later this year, policy insiders said, as growing debt risks, higher US interest rates, capital outflows and possible trade tensions with the United States threatened to knock the economy.

The policy insiders say last month’s introduction of a mysterious ‘counter-cyclical factor’ that increases the central bank’s influence over the yuan’s reference rate showed how serious authorities are about flushing out bearish bets and heading off any slide towards 7 yuan to the dollar.

The move highlighted the challenge China faces between safeguarding economic and currency stability and speeding up capital market reforms — important steps in its quest to internationalise the yuan.

“They (authorities) are clearly tightening their grip (on the yuan), which is related to politics and diplomacy,” said a policy adviser. —