SHANGHAI/HONG KONG (Reuters) – China announced more tools to support its weak currency on Monday, revealing plans to park more dollars in Hong Kong to strengthen the yuan and improve capital flows by 'allow companies to borrow more abroad.
A dominant dollar, sliding Chinese bond yields and threats of higher trade barriers when Donald Trump takes over the US presidency next week left the yuan hitting around 16-month lows, forcing its ' central bank to act.
The People's Bank of China (PBOC) has tried other methods to arrest the sliding yuan since late last year, including warnings against speculative moves and efforts to collect yields.
On Monday, authorities warned again not to speculate on the yuan. The PBOC raised the limits for offshore borrowing by companies, ostensibly to allow more foreign exchange to flow in.
Meanwhile, PBOC Governor Pan Gongsheng told the Asia Financial Forum in Hong Kong that the central bank will significantly increase the share of China's foreign exchange reserves in Hong Kong, without giving details.
China's foreign reserves stood at about $3.2 trillion at the end of December. Little is known about where the reserves are deposited.
“Today's comments from the PBOC indicate that currency stability remains an important priority for the central bank, despite the fact that the market is often talking about the possibility of a deliberate devaluation to add against taxes,” said Lynn Song, chief economist for Greater China at ING.
“The increase in China's foreign reserves will provide more ammunition to protect the currency if market conditions ultimately require it. ”
China was trading at 7.3318 per dollar as of 0450 GMT on Monday, close to a 16-month low of 7.3328 on Friday.
It has lost more than 3% against the dollar since the US elections in early November, on concerns that Trump's threats of new trade tariffs will put more pressure on China's struggling economy.
The central bank has been setting its official midpoint guidance on the firmer side of market forecasts since mid-November, which analysts say is a sign of unease about the yuan's decline.
Monday's announcements underscore the PBOC's challenges and juggling act as it tries to revive economic growth by keeping monetary conditions easy, while also trying to wake up the runaway bond market and at at the same time to stabilize the currency amid political and economic uncertainty.
In the last few days he has announced other measures. In an effort to prevent yields from falling too much and to control the circulation of the yuan offshore, it said it is suspending bond purchases but plans to issue large amounts of bills. out in Hong Kong.
Gary Ng, senior economist at Natixis, said that while China's mainland market has a much better pool of yuan deposits, Hong Kong has a “significant role with higher turnover driven by FX swaps and spot transactions.”
“This means that Hong Kong can be a place to support the yuan through trade activity and potential investments.”
Data on Monday showed China's exports got a boost in December, with imports also showing recovery, although the year-end export spike was partly fueled by record-breaking factories -property abroad as they press for more trade risks under the Trump presidency.
