China allows Yuan to weaken amid capital outflows

May 23, 2024 (MLN): China signaled its permission for the yuan to weaken against the dollar, as a jump in capital outflows and a resilient greenback pressured the central bank into loosening its grip, as Bloomberg reported.

The People’s Bank of China weakened its daily reference rate for the yuan to a level unseen since January.

The move came as the currency slid in the spot market this week amid signs investors are avoiding yuan-denominated assets for higher-yielding ones and bets the dollar will stay strong.

The PBOC’s tweaks to the so-called fixing — though moderate so far — may carry an important clue for the market, as it shows Beijing may be ready to end a pattern of supporting the yuan by holding the reference rate largely steady.

Such a move would have a far-reaching impact as the Chinese currency is seen as an anchor of stability for its regional peers.

“With the dollar strength likely to last a tad longer, the PBOC could be allowing a tad more headroom for dollar-yuan to rise,” said Fiona Lim, senior strategist at Malayan Banking Bhd.

However, the fixing is still stronger than estimates, which conveys the PBOC’s desire to limit the yuan’s weakness, she said.

For most of this year, Chinese authorities have maintained a strong hold on the yuan as a weak economy and the nation’s wide interest-rate gap with the US favor the dollar.

Worsening capital outflows, seen in a surge in local firms’ purchase of foreign exchange and exporters’ hoarding of the dollar, have also weighed on the currency.

The PBOC has been facing a constant battle to find the optimal pace of yuan weakness that’s conducive for growth, without triggering market panic or capital outflows.

Former Chinese officials said last week the nation should relax its control over the yuan as the current focus on keeping the currency stable has limited the scope for possible monetary stimulus.

On Thursday, the PBOC cut the fixing to 7.1098 per dollar. The yuan was little changed in onshore and overseas markets.

The dollar edged lower after an advance on Wednesday, when traders slashed bets for a rate cut after minutes from the Federal Reserve showed some officials questioning whether the policy was restrictive enough.

“The weaker fix is in line with the recovery in the dollar,” said Khoon Goh, head of Asia research at ANZ Group Holdings Ltd. “This is a continuation of allowing the yuan to be more flexible.”

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