Slight pressure on PBOC makes possible an unlikely yuan at $ 7 /

SHANGHAI (Reuters) – While the Chinese yuan is sliding at historically low levels against the dollar, the atypical light of the central bank suggests that policymakers want to be wiser in their interventions and not have a specific goal for the currency.

The yuan has lost more than 2.5% against the US dollar since the China-US disaster. Trade disputes worsened with rising rates at the beginning of the month. It is now less than 0.1 yuan from the $ 7 per dollar level that the authorities have indicated in the past.

A weakening of the yuan could lead to cash outflows, a major concern for policymakers wishing to maintain investor confidence in a slowing economy and an acrimonious trade war with the United States.

However, the People's Bank of China (PBOC) has done little to control the yuan, other than issuing yuan-denominated notes in Hong Kong and the average position of the currency managed daily. at a higher level than expected by the market.

"My feeling is that 7 is not as critical as in 2016. Decision makers are more confident," said Tommy Xie, head of China research at OCBC Bank in Singapore. "It also depends on the cost of the defense of the 7."

In 2015, a one-time devaluation of 2% yuan fueled expectations of depreciation and Beijing spent about $ 1 trillion (789 billion pounds) of foreign exchange reserves to defend itself.

In 2018, to keep the currency in place, the PBOC increased the cost of reducing the yuan by increasing reserve requirements for futures contracts. State banks also used swaps and sold dollars to strengthen the local unit.

Despite the trade war, it is only this week that senior central bank officials have launched a verbal campaign to remind the market that China can maintain the yuan "fundamentally stable" and rely on a panoply of policies to manage the fluctuations.

"Nothing has gone wrong, and we will not allow anything to go wrong," said Liu Guoqiang, deputy governor of the PBOC, at the Financial News, a newspaper run by the central bank.

The PBOC did not immediately respond to faxed Reuters questions regarding its yuan level policy and tactics.

(For a chart on the decline of the yuan in China, close to 7 dollars / dollar, click on tmsnrt.rs/2W6Aoqb)

SUBTILE MESSAGE

For yuan watchers, superficial actions and central bank messages suggest a higher comfort level with a weaker yuan, while the stability of the currency against a basket of trade-weighted currencies is proof that it does not encourage excessive depreciation.

"The authorities provide only the support needed to limit the weakness of the yuan, rather than trying to strengthen the currency significantly," wrote Lemon Zhang, a strategist at Standard Chartered Bank.

A weaker yuan would theoretically help exporters, many of whom feel the pinch of US tariffs on billions of dollars worth of products made in China.

BofAML badysts Claudio Piron and Ronald Man believe that China will limit the weakness of the yuan in the run-up to the G20 summit in late June, when US President Donald Trump and his Chinese counterpart Xi Jinping could meet.

If this meeting does not lead to a breakthrough easing trade tensions, "it is clear that China has the capacity and the need to depreciate the yuan in dollar / yuan 7.13. A fiscal stimulus and monetary easing would be needed to support the Chinese economy, "they said.

Analysts suspect, however, that the PBOC's strategy is not only aimed at achieving yuan levels, but also involves the management of its foreign exchange reserves and the growing role of the yuan internationally. These explain the reluctance of the central bank to reduce its dollar reserves too quickly or to raise interest rates on the offshore market in yuan, which would make it expensive to short the currency.

"If the central bank decided to intervene directly in the market, a drop in reserves, which would go from $ 3 trillion to $ 2 trillion, would cause a stronger shock to market confidence," said economist Raymond Yeung. Chief of Greater China ANZ Region in Hong Kong.

Yeung said the PBOC "does not want to see a huge gap between the onshore and offshore yuan, as this would affect the judgment of international institutions on the yuan's ability to serve as a reserve currency."

This week's offshore yuan was relatively weaker than the continent's, but the PBOC's sale of its debt to Hong Kong, aimed at draining offshore yuan supplies, took place on a small scale.

While the central bank is juggling multiple objectives, its liquidity injections abroad, designed to stimulate lending in a context of economic slowdown, have also been modest, especially to protect the exchange rate.