China’s central bank has denied devaluing its currency to weather the trade war and sent a veiled warning to “forces trying to short the yuan” after it weakened to a 22-month low against the US dollar.
Pan Gongsheng, a deputy governor of the People’s Bank of China (PBOC), said the State Administration of Foreign Exchange, which he heads, had “accumulated rich experiences and developed multiple policy tools” in defending the yuan, after the offshore exchange rate weakened to 6.97 on Friday.
“As for those forces trying to short the yuan, we have engaged directly a few years ago and we know each other very well,” Pan told a press briefing in Beijing. “I think our memories should still be fresh.”
Pan did not name any individuals or institutions he believed were shorting – selling a currency, hoping for a decline in the market price – nor did he elaborate on how Beijing had “engaged directly with” such parties in the foreign exchange market.
Those betting on a weaker yuan exchange rate are often viewed as unwelcome or even hostile by the Chinese government, which regards the yuan exchange rate not as a normal price indicator but as a symbol of China’s economic health that must be defended.
Fund managers and traders betting on a plunge in the Chinese currency’s value akin to those of Argentina’s peso or the Turkish lira have been left disappointed as China has kept the exchange rate under its control via direct market intervention, capital account controls and tweaks of trading rules.
Although Chinese fundamentals such as excessive money printing and economic deceleration offer reasons to bet on a weaker yuan, the exchange rate against the dollar has never weakened beyond 7 yuan to the dollar in the past decade.
The ongoing trade war with the United States has again fanned expectations that the yuan would weaken and that Beijing may tolerate a modest depreciation to offset tariffs, to help exporters.
The yuan has lost about 10 per cent against the US dollar since April. The US’ Federal Reserve Board is raising rates, while China’s central bank is leaning towards monetary easing.
However, Pan reiterated on Friday that Beijing had no plans to allow a sharp fall in the yuan, would not engage in “competitive devaluation” and would not use its currency as a weapon in the trade war.
“China is a responsible big country,” Pan said. “We are not going to competitively devalue [the yuan], we will not use the exchange rate as a tool to respond to trade conflict and market volatility.
“The central bank has reiterated this many times. Today I will reiterate again.”
He declined to comment directly on yuan exchange levels but said the central bank had sufficient reserves to keep the exchange rate stable, adding that it still “reflects the supply and demand and movements in the international foreign exchange market”.
The pressures of capital outflow and yuan depreciation remain visible in China. According to data published by the exchange regulator yesterday, Chinese banks sold a net 110.3 billion yuan (US$15.9 billion) to companies and individuals in September, the highest since December 2016, in the latest sign that capital outflows are picking up amid weakness in the yuan.
Analysts at Commerzbank wrote in a note published last week that 7 yuan to the dollar would be breached if China’s trade conflict with the US lasts.
When China suddenly devalued the yuan by 2 per cent in August 2015 during its stock market rout, it suffered a US$500 billion capital flight that year, raising fears of a Chinese financial meltdown.
Three years later, Pan said, the country’s monetary authority was more experienced to keep a crisis at bay.
Becky Liu, head of China macro strategy at Standard Chartered Bank, said that despite high depreciation pressure, the PBOC was likely to keep the yuan stable ahead of the G20 leaders’ annual summit next month.
“The US has made it clear a stable renminbi is a prerequisite [to settling the trade dispute],” said Liu, adding that there were only limited players shortening the yuan in the onshore market.