The decline of the dollar pushes China to weaken the yuan’s strength after months of its support

The continuous decline in the Chinese People’s Bank has led to a change in its currency management, as it turns from the yuan support to trying to reduce the risk of its rapid rise.

The Chinese Central Central this week set the daily reference exchange rate of the yuan at a slightly weaker level of market expectations, after it was set at the price at stronger levels for the past six months.

The bank is also preparing to stop selling bonds in Hong Kong for the third month, which is the longest interruption period since 2018, which keeps liquidity abundant and relieves the upward pressures on the yuan, in addition to that, dealers monitored state -owned banks buying the dollar in the local market in recent weeks, in an attempt to slow the pace of Chinese currency gains.

This shift by the Chinese People’s Bank is the latest example of how the dollar falling on the global financial markets affects, as other central banks began to back down from supporting their currencies, and preparing to follow more facilitating policies to enhance growth.

In the case of China, the authorities have to deal with caution, as the vulnerability of the yuan sharply may lead to the displacement of capital, while its rapid height may harm exports.

The repercussions of the commercial armistice

The head of the exchange strategy and interest rates for the Grand China region at BNB Pariba Bank Joe Wang said, “The local situation in China is not ready to bear a significant increase in the value of the yuan, we still believe that the yuan will remain behind the currency basket, despite the weakness of the dollar and the talk about reducing dependence on it.”

The commercial truce between Beijing and Washington contributed to supporting the Chinese currency, as the yuan rose by more than 2% against the dollar since it recorded its lowest level in 18 years in April. This height enabled the People’s Bank to reduce its defenses from the currency.

In this context, the bank refrained from issuing bonds in Hong Kong, and according to the “Bloomberg” accounts, the tools that resulted in its entitlement in the three months to May pumped 85 billion yuan ($ 11.8 billion) in the market, which helped to keep the financing costs for a month on the yuan at 1.7%, compared to 4.5% in January, when the bank offered additional bonds to pressure speculators on the currency drop.

Government support position

The latest economic data confirms the need to prevent the yuan from raising very quickly. Despite the resilience of exports, the continuous shrinkage of prices and the weak local consumption highlights the need for government support.

Analysts say that Chinese officials are unlikely to stand the spectator if the yuan continues its rapid rise, similar to what happened with the Taiwan and Korea work recently.

The Asian currency strategy in Mizuho Bank Ken Cheung said, “With the return of the dollar sale wave, it is likely that the Chinese People’s Bank will move with caution to avoid excessive increase in the value of the yuan, because of this pressure on China’s exports in light of the customs duties war.”