By Sergei Manukov
The slow growth of the Chinese economy in recent times has greatly disappointed the markets. So to try to restore the shattered confidence, the Chinese authorities have decided to fight the weak yuan by fixing the rate for the controlled currency. The main Chinese bank - People's Bank of China (RVOS) set on August 18 a fixed (base) dollar rate against the yuan at 7.2006, while the rate of 7.3047 was predicted by Bloomberg analysts and economists. This is the largest gap in the five years that Bloomberg polls experts. On Thursday, the rate was 7.2076 yuan to the dollar.
Last week, the Chinese authorities sharply increased support for the weakening yuan, but despite this, it continued to decline to multi-year lows, both in the domestic and foreign currency markets. This week, the Chinese Ministry of Finance demanded that state-owned banks step up their interventions. At the same time, the RVOS said on August 17 that it would carefully monitor that the banks did not go too far.
Beijing fears that sharp fluctuations in the yuan will provoke attacks by speculators, like those that occurred during the shock collapse of the Chinese currency eight years ago. When bearish sentiment in the foreign exchange market intensifies to a maximum, there is a serious threat of a powerful outflow of capital and an even stronger weakening of the yuan, which is exactly what the Chinese government wants to avoid.
In order to bring the crisis under control early on, the RVOS plans to tightly control the yuan by fixing exchange rates on a daily basis, limiting deviations in both directions to 2 percent. If the currency "bears" refuse to follow the rules of the game, then the central bank is ready to take more radical and drastic measures. We can talk, for example, about injecting dollars, increasing the cost of working on the forward market, and even artificially creating a deficit of the Chinese currency in Hong Kong.
“With the dollar-yuan practically hitting a historic high and confidence plummeting due to fears of a dangerous rise in debt, it is imperative for the Bank to monitor the market very closely now and take all necessary measures to stabilize the yuan,” explains Xiaojia Zhi of Credit Agricole CIB. .- A rapid depreciation of the yuan could further weaken market confidence and increase risks.”
After the exchange rate was set on August 18, the yuan slightly strengthened and generally recovered from the more than 9-month low reached the other day against the US dollar.
In addition to working with the exchange rate, the central bank asked banks to closely monitor the market and exclude all speculation in the yuan. This request-demand came after the offshore yuan fell to 7.35 per dollar. Naturally, this level did not go unnoticed in the PRC Ministry of Finance.
Of course, the state of the yuan is greatly affected by the economy of China, especially in the long term - the yuan reacted to a significant slowdown in its growth with a strong weakening. Suffice it to say that the gap in rates between ten-year Chinese and US government bonds has now reached a 6-year high. Naturally, in such a situation, investors prefer the American currency to the Chinese one. Repulsing investors from the yuan and disappointing statistics on retail trade and real estate prices, combined with a deep crisis in the construction industry. Added tension in the financial market and the reduction of the RVOS rate to accelerate economic growth.
this article originally appeared at expert.ru