As nearly all currencies weaken against the dollar, Chinese policymakers must decide whether it’s worth it while resisting a tightly controlled yuan depreciation.

Hina’s currency rapidly approached levels that prompted authorities to end depreciation episodes in 2020 and 2019 when the yuan approached 7.2 per dollar, depreciating about 4 percent below current levels I’m here. Strategists say it’s only a matter of time before the yuan rises above 7 yuan, a key defensive line for China’s central bank in recent years.

It remains unclear where Beijing’s depreciation limit lies. However, the scale and intensity of the measures taken so far suggest that the focus is on the pace of the yuan’s movement rather than its direction. The sharp appreciation of the dollar and uncertainty over the strength of China’s exports are among the reasons authorities allow the yuan to weaken.

“If the yuan hits $10 and the euro and yen stabilize against the dollar, the problem will get worse,” said Jim O’Neill, senior adviser at Chatham House. “But if the dollar is rising against all currencies due to Fed tightening, there is not much China can do.”

The renminbi has depreciated 8.5% against the dollar this year, its seventh straight month of decline, but still outperforms some major regional currencies. The won has fallen 5.7% this year and the yen has fallen almost 13% against the Chinese currency.

Indeed, there are many reasons for the yuan to depreciate. For example, differences in monetary policies with many countries in the world, interest rate differentials, capital outflows, and a slowdown in the Chinese economy. However, additional losses could fuel speculation that authorities are unshackleing the currency, causing traders to bet on further depreciation. Such one-way bets have long been resisted by the PBOC. It’s been done.

“This is the challenge with managed currencies. Stated. “Too weak is often a red flag for foreign investors, suggesting that Chinese officials may know things we don’t.”

China’s central bank has taken a number of steps to ease dollar pressure, including setting a stronger-than-expected reference rate for 13 straight days. It has also reduced the amount of foreign currency that banks must hold in reserves.

None of these measures were strong enough to stop traders from expressing stronger bearishness on the yuan. Rhetoric from policymakers also sounds less alarming, with PBOC Deputy Governor Liu Guoqiang saying last Monday that the yuan’s depreciation against the dollar this year has been much smaller than other major currencies. .

Two-way fluctuations will become the norm in the short term, he added, and cautioned against betting on specific levels.

Some analysts say the yuan could weaken further. Bank of America expects the currency to end the year at 7 per dollar, while Nomura Holdings expects it to fall to 7.2.

“Spot levels are driven by both domestic and international factors,” said Lemon Chan, forex strategist at Barclays in Singapore. “Defending a certain level with headwinds from both can be costly.”

There is little evidence that currency markets are panicking at this time. Anders Fagemann, senior portfolio manager at Pinebridge Investments in London, said this will continue as long as the yuan moves in line with economic fundamentals. But he warned that tranquility could easily spiral into chaos if the end of China’s draconian Covid-free policy is delayed or the country’s housing crisis worsens.

Policymakers have ample tools to manage the currency, including further easing bank reserve requirements and increasing bill issuance to tighten yuan liquidity. It can also take more aggressive measures, such as adding a risk premium to foreign exchange futures trading. This will increase the dollar funding cost and discourage speculators.

“If the yuan depreciates above 8.5, policymakers will have some serious questions to answer,” Faergemann said.

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