China to use 'counter-cyclical' measures to curb FX volatility

A man walks past the headquarters of the People's Bank of China (PBOC), the central bank in Beijing. — Reuters pic
A man walks past the headquarters of the People's Bank of China (PBOC), the central bank in Beijing. — Reuters pic

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BEIJING, July 19 ― China's foreign-exchange regulator said today it was well-equipped to keep currency markets stable amid intensifying trade frictions with the United States and prepared to counteract cross-border capital outflow volatility if it arises.

Wang Chunying, spokeswoman at the State Administration of Foreign Exchange (SAFE), told reporters the regulator would bolster “macro-prudential management” and “micro-level market supervision” and use “counter-cyclical” measures to deal with instability.

While Wang did not elaborate on details of such counter-cyclical measures, analysts see her comments as a warning that the central bank would not tolerate aggressive one-way speculation against the currency.

“We will make counter-cyclical adjustments to cope with short-term volatility in foreign exchange markets to maintain stability in the financial system and balance in international payments,” she told a media briefing.

The remarks did not appear to halt the decline in the yuan in onshore or offshore markets, where the currency has weakened about 7 per cent against the dollar since the end of the first quarter and continued to slip today.

The yuan's declines have come as Washington and Beijing stepped up their tit-for-tat exchange of tariffs and threats of tariffs on eachother's goods.

As of 0805 GMT, the onshore spot was trading at 6.7583, 378 pips or 0.56 per cent weaker than the previous late session close. Its offshore counterpart was trading 0.41 per cent weaker than the onshore spot at 6.7860 per dollar.

Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong, said Wang's remarks signalled that the foreign exchange regulator still had many tools at its disposal to deal with yuan depreciation expectations.

“If the yuan falls too fast over too short a period of time, the central bank would still take some action and make some comments,” Cheung said.

He added, however, that today's comment was not as strong as what the People's Bank of China (PBOC) governor Yi Gang offered when the yuan hit 6.7 per dollar two weeks ago, which had a calming effect on the market.

“(The comments) shouldn't affect the market until the day when the policy is implemented,” said a trader at a foreign bank in Shanghai, referring to counter-cyclical measures.

Traders and economists have been on alert for intervention or other attempts to slow the yuan's slide since it posted its worst month on record in June.

Wang said SAFE is paying close attention to cross-border capital flows and that it had been improving “contingency plans and policy reserves”.

While her comments about “counter-cyclical” measures did not make reference to specific market tools, some analysts have speculated in recent weeks that authorities may re-apply a “counter-cyclical factor” in their daily foreign exchange management to dampen depreciation expectations and slow the yuan's latest downtrend.

In May 2017, after a period of decline for the yuan, the PBOC added the secret counter-cyclical factor to its formula for calculating the midpoint reference rate for trading of the currency. The central bank effectively removed the x-factor at the start of this year, as the yuan rebounded.

Policy insiders told Reuters earlier this month that Beijing was expected to make use of other tools it has honed since 2015 to curb speculation and volatility in the yuan.

SAFE spokeswoman Wang said today the foreign exchange regulator could adjust its tool kit for managing cross-border capital flows, which includes the previously used FX risk reserves.

China's central bank implemented reserve requirements for financial institutions settling foreign exchange forward yuan positions in July 2016 before scrapping the requirements last September, when Beijing was anxious to quash one way bets on the yuan as outflows ease and exporters face strain.

Wang told the briefing that China's foreign debt levels were under control and that SAFE would closely monitor any changes and provide policy guidance as needed. ― Reuters

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