Less than two weeks after pledging to allow a freer exchange rate, the People’s Bank of China has tightened its grip on the yuan, according to BNP Paribas SA.
The onshore yuan has traded within 0.3 percent of 6.4 a dollar from Aug. 14, a level that BNP Paribas Chief Economist for Asia Richard Iley calls a de facto “dirty” peg. China devalued its currency last week and introduced a more market-determined method of setting the daily fixing, which the yuan can move as much as 2 percent either side of.
“With depreciation expectations in danger of turning extrapolative, the PBOC appears to be intervening heavily,” Iley wrote in a research note Friday. “The role of the market, rather than being enhanced, is actually reduced for now.”
China’s surprise devaluation sent shockwaves through global foreign-exchange markets and prompted Vietnam to adjust the dong’s reference rate and Kazakhstan to abandon controls on the tenge. Authorities in Asia’s largest economy had held the yuan at about 6.2 a dollar from March to support their bid to have it added to the International Monetary Fund’s basket or reserve currencies.
The central bank weakened the yuan’s reference rate by 1.86 percent on Aug. 11 and said that market makers who submit contributing prices to determine the fixing have to consider the previous day’s close, foreign-exchange demand and supply, as well as changes in major currency rates.
The reference rate weakened by 1.62 percent the following day and another 1.11 percent on Aug. 13. The fixing has strengthened every day since then, although by only 0.23 percent in total. The onshore spot rate fell 3 percent in the three days through Aug. 13 but has since been relatively steady.
“Whereas the daily fix was previously fixed to fix the spot rate, now the spot rate is being fixed” to determine the reference rate, said Iley.
Yuan positions at the central bank and financial institutions fell by the most on record in July, a sign of increased capital outflows and PBOC intervention to keep the yuan stable before last week’s devaluation.
China’s foreign-exchange reserves are expected to drop by some $40 billion a month for the rest of the year as the central bank supports the currency, a Bloomberg survey of 28 strategists and traders showed. The nation had $3.65 trillion of reserves at the end of July.
The PBOC pumped the most money into its financial system this week since February, underscoring how moves to protect the yuan have strained cash supply. Further sizable injections and a reserve-ratio cut for lenders are likely, according to Iley.
“China’s long-delayed decision to fight back in the global currency wars has opened a Pandora’s Box with already record rates of capital flight seemingly picking up further,” he said. “China’s enormous pile of FX reserves mean that heavy intervention can be sustained comfortably for a long time, although, of course, not indefinitely.”