China’s yuan: will the central bank defend the falling currency as its new Communist Party chief takes the helm?

People’s Bank of China (PBOC) promises ‘comprehensive measures’ to prevent wild swings in exchange rate as currency approaches key psychological threshold
Newly appointed PBOC party boss Pan Gongsheng is known for talking up yuan’s ‘safe haven’ role during his time as head of the foreign exchange regulator

Yuan

Luna Sunin Beijing

Published: 6:00am, 3 Jul 2023

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The market is waiting to see whether China’s monetary authorities will take action to defend the yuan as the Chinese currency hits a seven-month low against the US dollar and approaches a key psychological threshold.

Speculation about a possible intervention surged as the People’s Bank of China (PBOC) warned against big swings in the yuan exchange rate earlier this week, and Pan Gongsheng, chief of the State Administration of Foreign Exchange, was appointed as Communist Party chief of the central bank on Saturday.

The fast depreciation of the yuan, partly driven by the country’s weak post-Covid recovery, is one of the biggest challenges ahead for 59-year-old Pan, who has over two decades of financial industry experience and a track record of steering the foreign exchange regulator since 2016.

“We’ll take comprehensive measures to stabilise expectations and firmly prevent the big rise and fall of the exchange rate,” the PBOC said in a summary of its quarterly monetary policy meeting released on Friday.

Pan also attended the policy meeting, which took place on Wednesday.

The central bank has tried to assure the market that it is equipped with the necessary toolbox to maintain stability, and it emphasised the deepening of market-oriented reforms in the exchange rate system.

“The exchange rate of the Chinese yuan fluctuates in both directions, while remaining fundamentally stable at a reasonable and balanced level, serving as a stabilising force for the macroeconomy,” the meeting summary said.

The offshore yuan weakened to 7.28 against the US dollar on Friday, falling by 4.7 per cent since the start of the year to the lowest level since November. The PBOC has so far refrained from direct intervention in the foreign exchange market to steady the yuan.

The government set the yuan’s daily reference rate at 7.2258 on Friday.

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As chief of the country’s foreign exchange regulator, Pan has been talking up the Chinese currency’s role as a safe-haven asset to discourage fund outflows and promote the overseas use of the yuan. He also took part in reforms to China’s exchange rate policy to promote a more market-driven mechanism for determining the yuan’s value.

“We have accumulated considerable experience in dealing with external shocks over the years, and our macroprudential tools are more robust,” he told the Lujiazui financial forum in early June.

“We have the confidence, conditions, and capabilities to safeguard the stable operation of China’s foreign exchange market.”

The Chinese yuan is now nearing the key threshold of 7.3, a pivotal level that holds significant importance in market sentiment and expectations

Zhou Junzhi

A wider interest rate gap between China and the US is another factor weighing on the yuan exchange rate.

China slashed its policy rate by 10 basis points a week ago, although the US Federal Reserve is approaching the end of its interest rate tightening cycle.

“The Chinese yuan is now nearing the key threshold of 7.3, a pivotal level that holds significant importance in market sentiment and expectations,” said Zhou Junzhi, chief macro analyst at Minsheng Securities.

“There is a possibility of new measures being introduced in the near term to manage the exchange rate, with foreign exchange liquidity adjustment tools being the preferred choice.”