China’s yuan skips the stimulus party as state banks sell

SHANGHAI/BEIJING: China’s yuan has stayed steady through a week that saw authorities roll out massive stimulus and stock markets clock historic gains, its gains thwarted by state bank selling and speculation that the government does not want it to rise.

The tightly managed currency has strengthened only about 0.5% against the dollar, barely reacting as Beijing unveiled a long-awaited stimulus plan, ranging from big rate cuts to funding for the markets, and leaders pledged more steps to spur growth.

“It appears that the authorities do not favour rapid yuan appreciation at this juncture, neither do they prefer rapid depreciation,” said Frances Cheung, head of FX and rates strategy at OCBC Bank. “Stability is key, when the focus is on reviving growth.”

China’s major state-owned banks actively bought dollars and sold yuan to prevent the onshore unit from rising too fast and too far, four people with knowledge of the matter said.

The onshore yuan was close to trading below 7 to the dollar, and one trader said it would certainly have crossed the key threshold if determined state bank buying had not prevented it.

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The currency has been gaining slowly since hitting a low of 7.2776 in July, and has been rising alongside a decline in the dollar as markets price in rate cuts by the Federal Reserve.

This week, it has been in a 7.0012-7.0640 range, staying steady even as bonds and stocks reacted to the stimulus proposals, with the blue-chip CSI300 Index surging more than 15% and the benchmark Shanghai Composite index jumping almost 13% to post their best weeks since 2008.

The yuan also remains at the weak end of the CFETS trade-weighted index, which traders say the People’s Bank of China (PBOC) manages it against.

Rapid yuan appreciation could hurt exports, which have been one of the few bright spots in the world’s second-largest economy, analysts say.

And yuan appreciation could also become a vicious circle if it prompts exporters and other domestic businesses to rush to repatriate dollars stashed for months in higher-yielding overseas markets.

One indicator of the pent-up sums waiting to come home is non-financial corporate foreign exchange deposits, which hit $438 billion at the end of August, according to central bank data.

“Exporters’ FX positioning remains heavy, in our view, with the bulk of them have only stopped accumulating more FX since August; but they have not yet unwound previously accumulated positions,” said Becky Liu, head of China macro strategy at Standard Chartered.

Liu said in a note the yuan could rise to around 6.90-6.95, but may struggle to strengthen further as uncertainties around the US presidential election and the central bank’s concern about overly rapid appreciation were likely to keep it in check.