China: Central Bank intervention and upcoming trade talks halt the yuan’s slide
Measures implemented by the People’s Bank of China (PBOC) and trade talks between China and the United States scheduled for late August tamed the sharp depreciation of the yuan that started in April and accelerated in June. On 17 August, the yuan closed the day at 6.88 CNY per USD, which represented a weakening of 2.6% over the same day of the previous month. While the yuan has lost a relatively moderate 3.0% against the greenback compared to the same day last year, it has weakened 9.6% since April.
The slide of the yuan mostly reflects escalating trade tensions with the U.S. and cooling economic growth due to the government’s campaign to curb shadow banking and support financial deleveraging. Monetary tightening in the United States is also spurring capital outflows from emerging markets, adding further pressure on the yuan. Moreover, some analysts are speculating whether Chinese authorities are allowing the yuan to weaken to bolster the external sector in a context of subdued inflationary pressures and rising trade protectionism. Nevertheless, news that China and the U.S. will resume trade talks in late August halted the depreciation of the yuan in recent days. Furthermore, the yuan benefited from the PBOC decision to set its daily reference rates stronger in mid-August, preventing the yuan from declining further as the currency fluctuates by 2% around the daily fixing. Also, the PBOC initiative to set a reserve requirement of 20% on commercial banks’ purchase of foreign-exchange forwards supported the yuan.