The Chinese yuan continued to decline today after the country’s central bank lowered the midpoint around which the currency can trade against the US dollar by the most since January.
The People's Bank of China (PBoC) set the yuan's daily fix rate lower at 6.5382 against the dollar, down 0.16% from Tuesday, according to the State Administration of Foreign Exchange.
The currency had its worst day on Monday after the PBoC scrapped two rules, sparking speculation that the government wants to relax the yuan’s strengthening, ease capital control, and export strain.
‘The market took yuan’s fall as a sign that the PBoC bias for an appreciation in the yuan may be over,’ Johnny Chen, junior portfolio manager at NN Investment Partners told Citywire Asia.
On Monday, the Chinese central bank removed the 20% reserve requirement that financial institutions had to set aside when buying dollars for clients through currency forwards. This makes it easier for traders to buy the US currency, reducing pressure for yuan appreciation.
In addition, the PBoC also scrapped a requirement that banks hold reserves against yuan deposits held in Hong Kong and other offshore centres.
‘The short-term impact [of the rule change] is that the pace of currency appreciation should be reduced. The yuan, therefore, is more likely to trade range bound around current levels,’ said Chen.
‘While the long-term impact is that we should see further capital account liberalisation and reforms by policy makers going forward. It is reasonable to expect more two-way volatility in the currency in the long term,’ he explained.
The first rule on currency forwards was rolled out in October 2015, following the Chinese devaluation of the yuan. Aidan Yao, senior emerging Asia economist at AXA Investment Managers said in a report that the PBoC’s original reserve requirement effectively raised the cost of short-selling the yuan.
The reserve requirement for offshore yuan deposits was enacted in January 2016. This essentially locked up a portion of offshore yuan deposits at offshore clearing banks, reducing yuan available for lending.
The Chinese yuan has been soaring 6.9% since the beginning of 2017, reversing last year’s 6.5% record loss, as a result of Beijing’s effort to clamp down on capital flight and the PBoC’s countercyclical measure.