HONG KONG: China’s yuan initially firmed on Friday after the central bank said it would suspend treasury bond purchases, triggering a jump in bond yields, but later fell back to fresh 16-month lows.
The People’s Bank of China (PBOC) cited a shortage of bonds in the market as reason for the suspension. It planned to resume purchases depending on supply and demand in the government bond market.
The yuan retreated to 7.3324 per dollar, the weakest since September 2023, by early afternoon.
China’s 30-year treasury yield climbed five basis points in early trade while the 10-year yield rose four basis points following the announcement.
Some analysts said the PBOC is likely concerned about the widened US-China yield spread and the decision to halt bond buying shows a willingness to defend the currency.
Chinese government bond yields have tumbled rapidly since November amid a bond buying frenzy and expectations of further monetary policy easing.
“The announcement today sent a signal that the PBOC does not want to see the government bond yield in China fall further and add more pressure on the exchange rate,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management.
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Spot yuan opened at 7.3270 per dollar and was trading at 7.3317 by midday, 5 pips firmer than the previous late session close and 1.98% weaker than the midpoint.
Prior to market opening, the central bank set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1891 per dollar, its weakest since Dec. 27 and 1,247 pips firmer than a Reuters’ estimate.
Over the weekend, the central bank reiterated its resolve to keep the exchange rate stable during its latest policy meetings.
Analysts and traders believe Beijing will not tolerate significant yuan depreciation versus the dollar but allow for some gradual weakening to tackle deflationary pressures and tariff risks.
“We believe the PBOC is becoming more determined to prevent the yuan from sharp depreciation and may have shifted to a more discretionary approach in determining the timing of RRR (reserve requirement ratio) cuts and rate cuts,” Nomura analyst said in a note published on Friday.
The offshore yuan traded at 7.351 yuan per dollar, up about 0.1% in Asian trade.
The dollar’s six-currency index was 0.055% higher at 109.26.
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