How China prevents yuan depreciation

Compared to the yuan recession in 2015, China has had a more skillful and groundbreaking way to stabilize its currency this year, according to Reuters.

As the currency of the world's second-largest economy and largest exporter, the yuan's value determines global commodity prices and trillions of dollars in capital flows.

In 2015, when the yuan depreciated sharply, the People's Bank of China (PBOC) had to resort to official intervention, selling 1,000 billion USD of reserves to support.

But this year, as China's economy staggered and money left the country, the PBOC took a radically different approach to protecting the currency. The key measure is to coordinate the purchasing of RMB by state-owned banks.

Specifically, whenever the momentum seems to cause the yuan to slide, these banks will quietly buy. For example, in late May, they bought yuan for two days after the currency hit its lowest level of the year.

People's Bank of China (PBOC) headquarters in Beijing. Photo: Reuters

Similarly, buying yuan by state-owned banks increased sharply in December, after Moody's announced a cut in China's rating outlook. There is no evidence in official data that the PBOC officially sold USD as it did in 2015. However, market participants noted that banks sold USD by currency swap, which will not be seen in the data.

At the same time, smaller banks this year have received more informal "instructions" or "suggestions" from regulators, asking both banks and their customers to reduce their USD holdings, according to sources. Reuters news .

In June and July, China's Foreign Exchange Market Self-Regulatory Administration - overseen by the PBOC - asked major state-owned banks to cut interest rates on USD deposits, market observers said. This measure is intended to encourage businesses and families to switch from USD to yuan.

In 2023, the yuan will depreciate by nearly 2.8% against the USD. On September 8, the yuan hit its lowest level in 16 years. A few days later, managers of eight major banks were summoned to Beijing to meet with PBOC officials. They were told that companies wanting to buy more than $50 million would need PBOC approval.

Bankers were also told to cut back on spot trading, stagger their USD purchases and not hold a net long USD position at the end of any trading day. Authorities are also focused on monitoring the foreign exchange buying and selling plans of exporters because they hold large amounts of the currency, which can cause volatility.

In recent months, regulators have called banks and asked them to conduct almost weekly surveys on export customer intentions. Previously, telephone guidance was only sporadic and surveys were sent only monthly.

Thanks to a series of informal, flexible and continuous operating measures by the PBOC, the yuan has now stabilized above its lowest level in 16 years. In October, domestic yuan trading volume dropped 73% from August, to a record low of 1,850 billion yuan. According to analysts, this shows that Chinese bankers have heeded calls to reduce transactions, especially USD purchases.

But PBOC's strategy to prevent yuan depreciation this year also has weaknesses. This has paralyzed much of China's foreign exchange market and raised questions about the yuan's chances of becoming a global reserve currency, experts told Reuters .

Eswar Prasad, senior professor of international trade policy at Cornell University (USA), said the situation is now "significantly more complicated" because there are both global and domestic economic factors. He described the PBOC's use of "non-standard measures" to intervene in the foreign exchange market as only "preliminary measures" to prevent the yuan from devaluing too quickly.

An exporter named Zhu in Shanghai has been closely monitoring USD prices this year, as the company receives USD payments weekly. "My daily question is whether to keep them or exchange them for yuan," Zhu said. She has now decided to retain the USD in the hope that the yuan price will improve.