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China stepping up efforts to stem the yuan's descent: Report

WION logo WION 29-09-2022 wionnewsweb@gmail.com (Wion Web Team)
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News agency Reuters on Thursday (September 29) reported that China is stepping up efforts to stem the yuan's descent. Citing four sources with knowledge of the matter, it reported that China's central bank has asked major state-owned banks to be prepared to sell dollars for the local unit in offshore markets.

In order to review their holdings of the offshore yuan, state banks were told to ask their offshore branches. The Chinese currency looks set for its biggest annual loss since 1994 as it has lost more than 11 per cent to the dollar so far this year.

Raising concerns about domestic sentiment and potential capital outflows, the yuan's depreciation has been gradual and in line with the decline in major currencies against a dollar buoyed by aggressive Federal Reserve monetary tightening.

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Dwarfing the volumes traded on the mainland, the offshore yuan moves in lock-step with the onshore unit, but its trading volumes account for about 70 per cent of all yuan trades globally.

Although the total amount of dollar selling is yet to be determined, sources said the intervention plan involved using state lenders' dollar reserves primarily.

As the yuan's movements are largely dependent on dollar moves and the Fed's tightening trajectory, Chinese authorities have intervened in the past in the offshore yuan market to steer the yuan.

After a one-off 2 per cent devaluation in 2015 that roiled global financial markets, China burnt through $1 trillion of its official forex reserves to prop up the currency.

Through persistently setting firmer-than-expected mid-point fixings, the latest proposal follows other steps authorities have taken to put a floor under the yuan.

By increasing the cost of shorting the currency by lowering the amount of foreign exchange financial institutions to reinstating risk-reserve requirements on currencies purchased through forwards, the People's Bank of China has also rolled out policy measures this month.

While they sought to steer and defend the weakening currency, Chinese monetary authorities told local banks to revive a yuan fixing tool it abandoned two years ago.

(With inputs from agencies)

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