(Bloomberg) — China ramped up its support for the yuan with a warning and tweaks to its capital controls, after the currency dropped close to a record low against the dollar in offshore trading.
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The People’s Bank of China and other regulators will strengthen their management of the foreign-exchange market, deal with any behavior that may disrupt market order and prevent the risks of an overshoot in the yuan. Beijing will make sure the currency is basically stable at reasonable levels, the central bank said in a statement.
Also on Monday, the PBOC adjusted its rules to allow firms to borrow more from overseas. It raised the so-called macro-prudential parameter for companies and financial institutions cross-border funding to 1.75 from 1.5, according to a statement. The last time it made a similar move was in July 2023.
The yuan’s tumble in recent months, spurred by a sluggish Chinese economy, a stronger dollar and potential US tariff hikes, has traders pondering the PBOC’s commitment to defend the currency. So far, the central bank has been holding the daily fixing slightly stronger than the 7.2 threshold to offer support since Donald Trump won the US presidential election.
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“For now, yuan stability remains a priority,” said Tommy Xie, head of Asia macro research at Oversea-Chinese Banking Corp. However, “in the medium term, the success of this strategy will hinge on economic fundamentals,” he said.
The daily reference rate, which limits moves in the onshore yuan by 2% on either side, is the PBOC’s most frequently-used tool to manage the currency. On Monday, it issued yet another fixing that was significantly stronger than the market had estimated.
The PBOC has dug deeper in its toolkit of currency support this month.
The central bank is planning to issue a record amount of bills in Hong Kong, a move that will mop up offshore liquidity and drive up demand for the currency. Also, it has suspended government bond purchases, which can help slow relentless drops in China yields and narrow its interest-rate discount to the US.
State-owned banks last week scaled back their yuan lending in Hong Kong, making it costlier for investors to build short positions, according to traders.
Still, investors had been expecting the PBOC to eventually allow the yuan to weaken to offset the impact of potential US tariffs. The Federal Reserve’s caution over future interest rate cuts amid strong US data at a time when the PBOC is expected to ease its policy further is also pressuring Beijing to give in.
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The support measures “will likely to offer some support for the yuan in the near-term, though it does little to change the factors which have contributed to depreciation pressure,” said Lynn Song, chief greater China economist at ING Bank. “Our view is that the dollar-yuan will remain a relatively low volatility pair compared to other Asian currencies.”
–With assistance from Betty Hou and Yujing Liu.
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