HONG KONG: China’s yuan firmed to a three-week high against the dollar on Friday, following the central bank’s latest action to support the currency by cutting the amount of foreign exchange that banks must hold as reserves.
A private-sector survey showing China’s factory activity surprisingly returned to expansion in August also helped improve sentiment.
The People’s Bank of China announced it would cut banks’ foreign exchange reserve requirement ratio (RRR) by 200 basis points (bps) to 4% from 6% beginning Sept. 15.
It was the first such cut this year, and could lower dollar funding costs in the interbank market and ease pressure on the yuan, which weakened to a nine-month low in August due to the country’s property sector woes, stalling recovery, and widening yield differentials with the U.S., traders and analysts said.
The FX RRR cut will “improve the supply of dollars onshore, and could move the (onshore spot yuan) higher,” Citi analysts said in a research note on Friday.
“This can be also seen as part the current round of accelerated policy rollout which works more directly on asset markets. If the accelerated pace continues, it may help stabilize sentiment to some extent and prevent outsized bearish moves on China risk assets including the renminbi FX.”
The yuan bounced in both onshore and offshore trade to three-week highs after the news.
The onshore yuan surged to a high of 7.2360 per dollar in the early Asian session, its strongest since Aug. 11, before last fetching 7.2550 around midday, 45 pips stronger than the previous late session close.
Its offshore counterpart was trading at 7.2589 per dollar by midday.
Currency traders and analysts said the FX RRR reduction should lift investor sentiment and underpin the the yuan in the short term.
“But such measures, based on historical experience, had not been a policy that could lead to a turnaround of medium-term direction of the CNY,” said Becky Liu, head of China Macro Strategy at Standard Chartered.
“That suggests, these counter-cyclical measures only aim to stabilise the CNY and reduce overly speculative positions, instead of altering the trend of USD/CNY which remains to be fundamentally driven.”
Marco Sun, chief financial market analyst at MUFG Bank (China) said the PBOC’s decision to lower the FX RRR was widely expected.
Meanwhile, the central bank continued its months-long trend to set the daily fixing at firmer-than-expected levels.
The People’s Bank of China (PBOC) set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1788 per U.S. dollar prior to the market’s open, firmer than the previous fix at 7.1811 and over 1,100 pips stronger than market projections.
The FX reserve ratio cut also came amid other efforts by the authorities to shore up the embattled property sector, as the central bank and financial regulator said they would lower the existing mortgage rate for first-home buyers from Sept. 25 to revive a property market that is struggling amid a debt crisis and liquidity crunch.
The yuan, down 4.9% this year, has been weighed down by concerns on the country’s property sector crisis and the country’s sputtering economic recovery.
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