China is asking banks to avoid Yuan market ‘herd behaviour’

Chinese one-hundred yuan banknotes are arranged for a photograph in Seoul, South Korea, on Monday, Dec. 21, 2015. (Bloomberg pic)

BEIJING: The People’s Bank of China’s recent efforts to support the yuan included a meeting Monday with the nation’s biggest lenders where currency stability was emphasized, according to people familiar with the matter.

The PBOC urged the banks to prevent any “herd behaviour” and momentum-chasing moves in the foreign-exchange market, the people said. The central bank has plenty of tools to stabilize the market, will keep the yuan flexible and allow it to move in both directions, a PBOC official told the lenders in the meeting, according to the people.

For much of the yuan’s 6.7% slide against the dollar over the past three months — the biggest decline among Asian currencies — there was little evidence policymakers were pushing back against the move. That changed late Friday as the currency posted its eighth straight weekly drop, prompting the PBOC to make it more costly to place short bets. Monday’s meeting is another sign officials are focused on avoiding the capital outflows of 2015-16 that ended up costing China hundreds of billions of dollars in foreign-exchange reserves.

Any pressure building on the yuan will need to be released in a timely manner and China will not work against market forces, the PBOC official told the lenders in the Monday meeting, according to the people, who asked not to be named as they weren’t authorized to speak publicly. Cross-border capital flows are balanced overall, and China’s fundamentals will provide support for a stable yuan, even though the currency weakened since June, according to the official.

The onshore yuan has tumbled due to the escalating trade war and slowing Chinese economic growth. PBOC moves to inject liquidity and support lending have put China’s monetary policy on a divergent course from the US, also putting pressure on the yuan.

The PBOC didn’t respond to a request for comment made outside of business hours with regard to Monday’s meeting. Representatives of lenders at the session suggested the PBOC could use the “counter-cyclical factor” to guide market expectations for the yuan. That element was introduced last year to the daily setting of the reference rate for the currency, against which fluctuations are allowed within a band, but hasn’t been used in recent months.

Strategists have highlighted the use of this adjustment mechanism as a possible next step to stabilize the currency. The 14 lenders at the meeting provide quotations of the yuan’s reference rates to the central bank every morning.

“This move is consistent with what the PBOC did earlier — it can be considered as preemptive efforts made to slow the yuan’s depreciation, prevent one-sided bets on weakness and avoid a sense of panic,” said Eddie Cheung, Asia foreign-exchange strategist at Standard Chartered Plc in Hong Kong.

The offshore yuan extended gains after the news of meeting broke, rallying 0.66% to 6.8206 a dollar by the New York close. It rose a further 0.14% to 6.8108 early Wednesday. The onshore currency closed up 0.4% at 6.8278 in Shanghai on Tuesday.

Cheung is among market participants who see the yuan holding stronger than 7 per dollar, even as the currency faces pressures from trade tensions and monetary-policy divergence. “That’s a strong psychological level,” he said.

Other steps China has taken in the past, along with outright deployment of foreign-exchange reserves to buy yuan, including squeezing offshore liquidity in the yuan market in Hong Kong, which has yet to be deployed this time around.