Chinese Yuan Depreciates Sharply, Prompting Urgent Central Bank Intervention

Beijing, 20 June 2024: The Chinese Yuan recently experienced a significant drop, hitting a 16-year low of 7.32 against the US dollar before marginally recovering to 7.26. This sharp depreciation has attracted global attention, raising concerns about the stability of China’s economy and the broader implications for international markets.

In an urgent response, the People’s Bank of China (PBOC) initiated a reverse repurchase operation. This process involves the central bank purchasing securities from commercial banks with an agreement to resell them in the future. The primary aim of this maneuver is to ensure adequate liquidity within the banking system and to stabilize the currency. The PBOC’s intervention provided temporary relief, but the situation remains precarious.

Investor sentiment has turned increasingly bearish, exacerbating the Yuan’s decline against almost all major currencies. On May 29th, the Yuan fell to 7.2484 against the dollar, its lowest level in six months, before closing at 7.1106. This marked the tenth consecutive day of depreciation. Reports indicate that large Chinese banks have been buying US dollars in the offshore forward market and selling them in the spot market to support the Yuan.

On the same day, the PBOC announced a 7-day reverse repurchase operation, injecting 250 billion Yuan into the market at a steady interest rate of 1.8%. This resulted in a net injection of 248 billion Yuan, the largest since April 30th. Despite this emergency intervention, the Yuan only saw a slight rebound on May 30th, and its six-month low persisted.

According to Bloomberg, the primary driver behind the Yuan’s depreciation is the ongoing sell-off of Chinese assets by investors worried about the fragility of China’s economy. The Yuan’s weakness is particularly concerning because it continues despite a general decline in the US dollar. This suggests that the current pressure on the Yuan stems mainly from domestic economic concerns rather than external factors.

May has turned out to be even more challenging for the Yuan than April. Analysts attribute this to Beijing’s insufficient economic stimulus measures, signs of capital outflows, and lingering concerns about the US-China trade conflict. Data from Bloomberg indicates that since May, the Yuan has depreciated against all major currencies except the Argentine Peso. The exchange rates of the Yuan against 24 trading partner currencies have also shown the worst monthly performance in nearly a year.

Becky Luo, head of China Macro Strategy at Standard Chartered Bank, forecasts that the Yuan will continue to lag behind other currencies, especially in a weak US dollar environment. As the Yuan is a managed currency, it benefits less from the depreciation of the US dollar. The significant depreciation of the Chinese Yuan underscores the gravity of China’s economic challenges. The actions of the PBOC and the Yuan’s performance will remain critical indicators of the country’s economic health and resilience as it navigates this turbulent period.

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