The People’s Bank of China (PBOC) unexpectedly set the onshore yuan midpoint at 7.2006 per U.S. dollar on Friday, which is much higher than the forecast of 7.3065 per dollar anticipated by Reuters. This is the second day in a row that the fixed rate has outperformed forecasts by more than 1,000 basis points. The midpoint rate has routinely been roughly 900 basis points stronger than expected over the last four days.
In contrast to Reuters’ prediction of 7.3047, the central bank had set the midpoint at 7.2046 versus the dollar the day before. As a reference point for trade, the yuan midpoint marks a range of +2% to -2%. This means that each trading day, the yuan, commonly known as the renminbi (RMB), may move within a 2% range above or below the fixed rate.
The PBOC’s action follows a significant decline in the onshore yuan, which on Wednesday hit a 16-year low versus the dollar at a rate of 7.2981. The onshore yuan has increased by 0.1% as of Friday, hitting 7.2836 versus the dollar. The offshore yuan, on the other hand, witnessed a little drop and now rests at 7.3057.
It’s critical to differentiate between the offshore yuan (CNH) traded in places like Hong Kong and Singapore and the onshore yuan (CNY) traded inside mainland China.
Concerning possible intervention risks for the onshore yuan, Vishnu Varathan, Head of Economics and Strategy for Asia and Oceania at Mizuho Bank, stated his worries in a note. He pointed out that the CNY’s stability may be threatened by China’s slow economic expansion and financial unpredictability. Varathan said that geopolitical tensions, economic uncertainty, and financial concerns might pose problems for the onshore yuan in the longer future.
According to information that surfaced on Thursday, Chinese state banks traded dollars for yuan throughout the week on both domestic and international spot foreign currency markets. This approach is often used to halt the yuan’s decline.
The central bank highlighted its commitment to preserving appropriate and adequate liquidity in its second quarter monetary policy implementation report, using precise and effective policy tools to support economic recovery. Regarding the currency rate, the PBOC accepted logical and systematic sales and settlement of foreign exchange for the renminbi. In order to reduce the danger of exchange rate overshooting, it guaranteed the preservation of the RMB exchange rate at a stable level.
China imposes strict controls on the onshore yuan, differing from other major currencies like the U.S. dollar or the Japanese yen by basing its daily midpoint fix on the previous day’s closing level and inter-bank dealer quotes. The currency moves in a narrow range around the daily midpoint rate, and if deviations are big enough, the central bank could step in to reduce volatility.
