Weaker Central Bank Guidance Signals Potential Further Decline
The Chinese yuan has recently reached its lowest level in seven months, attributed primarily to a shift in the daily guidance issued by the People’s Bank of China (PBOC). Chinese authorities signal willingness to allow further depreciation of the yuan.
By 0323 GMT, the yuan had slipped by 0.04%, trading at 7.2712 against the US dollar, within a range of 7.2679 to 7.2714. Before the market opened, the PBOC set the midpoint rate at 7.1291 per dollar, marking its weakest point since November 21 and 1,483 pips firmer than Reuters’ estimate.
The spot yuan started trading at 7.2679 per dollar and was last recorded 28 pips lower than the previous late session close and 1.99% weaker than the midpoint. Maybank analysts noted a subtle change in the central bank’s guidance, with the average daily dollar-yuan fixing being raised by 5.1 pips and 2.2 pips in April and May, respectively. This adjustment has increased to around nine pips per day in June, with the seven-day moving averages rising to around 10-17 pips in the last week of the month.
Maybank’s note suggests that the PBOC has acknowledged the prolonged higher-interest-rate environment and the unfavorable yield gap, indicating a willingness to allow the yuan to weaken further. As a result, the yuan has declined by 2.3% this year, pressured by ongoing domestic challenges including a struggling property sector, weak consumer spending, and declining yields, all of which are driving capital outflows and deterring foreign investment.
Tuesday’s official guidance allows the yuan to fall as low as 7.2717. Concurrently, the US dollar has strengthened, approaching a nearly 38-year high against the Japanese yen, bolstered by rising 10-year Treasury yields. Analysts link this move to expectations of increased tariffs and government borrowing under a potential Trump administration.
The European Central Bank is hosting an event later in the day where US Federal Reserve Chair Jerome Powell is expected to speak, focusing on monetary policy. Some highly anticipated employment indicators are being released this week, including the JOLTS job vacancies data, which is a crucial Fed indicator.
In the offshore market, the yuan traded at 7.3049 per dollar, a slight increase of about 0.01% in Asian trade. Meanwhile, the dollar’s six-currency index was up by 0.057%, standing at 105.9.
China’s Central Bank Moves to Stabilize Falling Yields
In a bid to stabilize the declining yields, China’s central bank announced plans to borrow treasury bonds from some primary dealers in open market operations. Traders and analysts see this decision as an effort to curb the rapid fall in yields, which could lead to financial instability if left unchecked.
China’s sovereign bonds have enjoyed a bullish streak this year, with yields reaching record lows as investors seek fixed-income safe havens amid a shaky economy and volatile stock market. However, the sharp decline in yields has raised concerns among policymakers about the potential for rapid, speculative-driven reversals.
The PBOC, in an online statement, emphasized that this move is based on careful observation and evaluation of current market conditions, aiming to maintain stable operations in the country’s bond market. Following the announcement, yields on China’s 10-year and 30-year treasuries increased by nearly four basis points.
This statement from the PBOC aligns with a series of hints from officials earlier this year, indicating that the central bank might begin trading treasury bonds in the secondary market. In May, the PBOC mentioned plans to sell low-risk debt, including government bonds, while closely monitoring bond market changes and potential risks.
PBOC Governor Pan Gongsheng, speaking at the Lujiazui Forum last month, hinted that the central bank might soon start trading in the secondary bond market as yields continue to decline. The PBOC has historically bought bonds, notably in 2007 for the establishment of the sovereign wealth fund China Investment Corp. Currently, the bank holds 1.52 trillion yuan ($209.14 billion) worth of bonds, which represents about 5% of the treasury bonds in circulation and 1.4% of all local bond holdings worth $14.6 trillion by Chinese entities.
Conclusion
The recent movements in China’s yuan and the PBOC’s actions indicate a strategic response to both domestic and international economic pressures. The yuan’s decline, driven by weaker guidance from the central bank, reflects a broader willingness to allow the currency to depreciate in the face of ongoing challenges. Meanwhile, the central bank’s efforts to stabilize bond yields highlight a proactive approach to maintaining financial stability in a volatile market environment. These developments underscore the complex dynamics at play in China’s financial markets as the country navigates its economic landscape.
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