China Prevented A Yuan Sell-off Through Strategic Communication, Avoiding Market Panic And Maintaining Stability.

[China’s New Strategy to Stabilize Yuan]

China’s New Strategy to Stabilize Yuan

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In recent months, China has taken steps to stabilize the yuan by orchestrating state bank buying and providing market guidance to bankers. This approach, known as moral suasion, marks a departure from Beijing’s previous tactics in 2015 when the currency was under pressure.

During the 2015 crisis, the People’s Bank of China (PBOC) intervened by burning $1 trillion in reserves to support the yuan. However, in the current year, as China’s economy faced challenges and capital flowed out of the country, the PBOC opted for a different strategy. The central bank defended the currency by signaling to the markets what kind of selling it would and would not tolerate.

According to interviews with 28 market participants, regulators closely and frequently guided market actions to resist downward pressure on the yuan. PBOC Governor Pan Gongsheng emphasized preventing exchange rate overshooting risks and maintaining stable FX market operations.

The strategy implemented by the PBOC has prevented a destabilizing yuan slide. However, it has also had a chilling effect on China’s foreign exchange market, leading to decreased trading volumes and raising concerns about the yuan’s potential as a global reserve currency.

Eswar Prasad, Tolani senior professor of international trade policy at Cornell University, described the PBOC’s use of “non-standard measures to intervene in foreign exchange markets” as a form of “triage” to prevent rapid depreciation of the yuan.

As the currency of the world’s second-largest economy and biggest exporter, the yuan’s value influences global goods prices and capital flows. It also serves as an indicator of China’s economic challenges.

Market participants noticed a divergence between the PBOC’s daily yuan guidance and market expectations in June, signaling the central bank’s intentions to prevent the currency from declining.

In 2015, China faced a currency crisis, resulting in a sharp devaluation of the yuan. This time, the PBOC took a more targeted approach to manage the yuan, providing specific directions to banks and currency market participants.

For instance, state-owned banks discreetly purchased yuan whenever market momentum seemed to push the currency downward. Additionally, smaller lenders received “window guidance” from regulators to reduce dollar holdings.

The pressure on bankers mirrored the pressure on the yuan, leading to a significant reduction in onshore yuan trading volumes. Despite this, the currency has stabilized above its 16-year low in September.

Market players are cautious but not entirely compliant with the PBOC’s directives. Exporters, such as a Shanghai-based electronic components exporter, are closely monitoring dollar prices and making decisions based on expectations of a better yuan price for their dollars.

So far, the PBOC’s strategy has prevented a rapid decline in the yuan. However, its impact on the foreign exchange market and the currency’s global prospects remains a subject of debate.

Ultimately, China’s efforts to stabilize the yuan reflect the country’s determination to maintain control over its currency amidst domestic and global economic challenges.

China prevented a yuan sell-off through strategic communication, avoiding market panic and maintaining stability.

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