The People’s Bank of China (PBOC) has set the onshore yuan midpoint at 7.2006 against the U.S. dollar, significantly stronger than Reuters’ estimate of 7.3065 per dollar. This marks the second consecutive day that the PBOC’s fixing rate has exceeded Reuters’ forecast by over 1,000 basis points, continuing a trend of nearly 900 basis points above forecasts for four days in a row. Now let’s discuss, Is China Economy Under Pressure?
China Economy Under Pressure, Currency Yuan At Lowest!
Just a day earlier, the Chinese central bank had established the midpoint at 7.2046, whereas Reuters’ prediction stood at 7.3047.
The yuan midpoint serves as a reference point for trading and sets the trading range between +2% and -2%. This means that the yuan, also known as the renminbi (RMB) locally, is allowed to fluctuate by up to 2% above or below the fixed rate each trading day. The recent adjustment follows the onshore yuan’s decline to a 16-year low against the U.S. dollar on Wednesday, reaching 7.2981.
On Friday, the onshore yuan saw a 0.1% strengthening against the U.S. dollar, settling at 7.2836, while the offshore yuan slightly weakened to 7.3057.
To clarify, the onshore yuan, referred to as CNY, is traded within mainland China, while the offshore yuan, known as CNH, is traded in other markets like Hong Kong and Singapore.
Vishnu Varathan, the head of economics and strategy for Asia and Oceania at Mizuho Bank, highlighted increased risks of intervention for the onshore yuan due to China’s sluggish economic growth and financial instability, which could impact the stability of the CNY in the medium term. He emphasized that challenging geopolitical conditions alongside economic uncertainty might exert sustained pressure on the CNY.
What Reports are Saying?
According to reports citing insiders, Chinese state banks have been observed selling U.S. dollars to acquire yuan in both onshore and offshore foreign exchange markets this week. This move is usually taken to slow down the depreciation of the yuan.
The PBOC, in its second-quarter monetary policy implementation report, stated its commitment to maintaining reasonable and sufficient liquidity, along with a “precise and powerful” policy to bolster the country’s economic rebound.
Addressing the exchange rate, the PBOC highlighted that foreign exchange transactions for the renminbi were conducted “rationally and orderly,” while market expectations remained stable. The PBOC pledged to uphold the basic stability of the RMB exchange rate at a reasonable and balanced level and to prevent the risk of an exchange rate overshoot.
China exercises strict control over the onshore yuan, determining its daily midpoint against the U.S. dollar based on the previous day’s closing level and inter-bank dealer quotations. This approach differs from major currencies like the U.S. dollar or Japanese yen, which enjoy free-floating exchange rates.
The onshore yuan is allowed to trade within a narrow range around the day’s midpoint rate. If it strays too far from this range, the Chinese central bank intervenes by buying or selling the currency to curb excessive daily volatility.
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