China steps up policy measures to defend fragile yuan

SHANGHAI (Reuters) - China stepped up its policy measures on Monday to defend a weakening yuan by relaxing rules to allow more offshore borrowing and sending verbal warnings as the Chinese currency hovered around 16-month lows against a strong dollar.

The yuan has faced renewed depreciation pressures, weighed down by a triple-whammy of a broadly stronger greenback, falling Chinese yields and rising trade tensions with other economies.

The People's Bank of China (PBOC) announced on Monday that borrowing limits would be raised to allow corporates to borrow more from abroad.

The ratio under its macro-prudential assessments (MPA) - determining the maximum a company can borrow relative to its net assets - would be raised to 1.75 from 1.5, with immediate effect.

The move was to "further improve the macro-prudential management of cross-border financing, continue to increase the sources of cross-border funds for enterprises and financial institutions, and guide them to optimise their asset-liability," the PBOC said in a statement jointly issued with the foreign exchange regulator.

Separately, the China Foreign Exchange Committee planned to resolutely keep the yuan exchange rate basically stable at reasonable and balanced levels, the central bank said in another statement.

The committee is a forum under the sponsorship of the central bank and the foreign exchange regulator.

The committee also said that monetary authorities will increase FX market resilience and strengthen market management. They will also correct pro-cyclical market activities, deal with behaviours that disrupt market orders and prevent exchange rate overshooting risks.

And in Hong Kong, PBOC Governor Pan Gongsheng told the Asia Financial Forum on the same day that "China has the confidence, conditions and ability to maintain stable operation of the foreign exchange market."

China will keep the yuan exchange rate basically stable at reasonable and balanced levels," Pan reiterated.

These measures are "sending a signal to stabilise the yuan," said Ken Cheung, chief Asian FX strategist at Mizuho (NYSE:MFG ) Bank.

"But the actual impact on capital flows and exchange rate is relatively limited, due to the low cost of domestic financing."

Cheung said regulators will continue to mainly use the daily midpoint fixing to stabilise the currency and guide market expectations.

China's onshore yuan traded at 7.3315 per dollar as of 0247 GMT on Monday, not far from a 16-month low of 7.3328 hit on Friday. It has lost more than 3% to the dollar since U.S. President-elect Donald Trump won the election in November.

The central bank has been setting its official midpoint guidance on the firmer side of the key 7.2 level and stronger than market projections since mid-November. Traders and analysts widely interpret this as a sign of rising unease over recent yuan declines.



The PBOC said last week that it will sell 60 billion yuan worth of six-month yuan bills in Hong Kong on Jan. 15, the most since the central bank started such bill sales in the financial hub in 2018.

Selling these yuan bills will mop up liquidity in the market to reduce speculative bets against the yuan.

Source: Investing.com