Chinese central bank warns investors against betting against yuan

The People’s Bank of China (PBC) has warned currency speculators against betting against the yuan, saying, “Do not bet on one-way appreciation or depreciation of the yuan, as losses will definitely be incurred in the long term.”

The Chinese central bank also said that it would put currency stabilization as the “top priority.” This statement is a response to the onshore yuan’s recent plunge against the U.S. dollar, reaching its lowest position against the greenback since January 2008 at 7.2458 per dollar.

Per Bloomberg, this warning was directed at certain corporations and financial institutions that reportedly went against the Chinese government’s monetary policies. Before the yuan’s steep fall on September 28, the PBC allegedly had planned to “dampen speculative demand” by implementing a 20-percent risk reserve requirement ratio (RRRR).

The new RRRR rate will be imposed on any financial institution buying foreign fiat using forwards. According to Goldman Sachs, an increase in RRRR would slow down the yuan’s plunge ahead of the 20th Congress of the Chinese Communist Party.

Currency investors are instead urged to “voluntarily safeguard the stability of the market.” The institution encouraged these currency market players to be “firm” in the face of massive rallies and plummets in the exchange rate.

A Reuters report revealed that the Chinese yuan had struggled against the dollar since the Federal Reserve started to hike interest rates to tame domestic inflation, which peaked at 9.1 percent in June this year. Since early 2022, the yuan has depreciated by 12 percent against the U.S. currency. Their exchange rate breached the 1:7 point earlier this month.

Unlike other central banks, the PBC cut the country’s interest rates to improve economic growth. The decision came as the country’s growth rate fell to 2.2 percent, less than half of its projected rate of 5.5 percent. Although this approach might help the yuan’s rally, Iris Pang of ING said that the yuan would continue to weaken if the U.S. maintained its “hawkish tone” into 2023.

China’s interference in yuan’s rate

The Chinese government reportedly re-implemented a currency fixing method, first used in 2017, earlier this week. The strategy involves an “X-factor” that introduces a bias in the currency market. To implement the method, the government contacted 14 influential domestic banks.

Grant Wilson of Exante Data said that the Chinese administration opted to secretly intervene to manage the change in the yuan’s value while still supporting export activities. Wilson also said it would prevent them from being labeled a “currency manipulator.”

“The stability of official reserves ensures that China does not meet one of three criteria used by the U.S. Treasury to label a country a currency manipulator,” Wilson said.

The Exante Data senior advisor explained that the government interference would not appear in the PBC’s official data. Instead, it would be shown in “the balance sheet of China’s state banks as net foreign currency assets.”

The PBC also attempted to support the yuan’s exchange rate by lowering the foreign fiat deposits that domestic banks were required to reserve from eight percent to six percent earlier this month. This method increased the amount of foreign fiat available to purchase the yuan, boosting its exchange rate against foreign currencies.