By Pete Sweeney and Samuel Shen
SHANGHAI: China’s yuan firmed on Monday as the central bank announced what appeared to be its latest attempt to deter offshore speculation in the currency, while stocks steadied close to levels last seen at the depths of last year’s summer crash.
The People’s Bank of China (PBOC) said it would start implementing a reserve requirement ratio (RRR) for some banks involved in the offshore yuan market, in a move that seemed intended to soak up additional liquidity.
“All in all, it appears that the Chinese authorities want to dampen the speculative flows that bet on a fast depreciation of its currency,” Zhou Hao, senior emerging markets economist for Asia at Commerzbank AG in Singapore, said in a note.
A turbulent start to 2016, with currency and stock markets tumbling, has stoked concerns that Beijing’s policymakers are in danger of fumbling as China heads towards its slowest growth in 25 years. Beijing will release GDP data for 2015 on Tuesday.
Chinese shares opened sharply lower, before recovering to bounce in and out of positive territory. The benchmark Shanghai Composite Index was little changed at the midday break, while the CSI300 index of the largest listed companies in Shanghai and Shenzhen had edged up 0.2 percent.
Chinese equities had tumbled on Friday, with the Shanghai index closing lower than at any time since December 2014, leaving most investors who put their faith in Beijing’s measures to end last summer’s crash nursing losses.
“After experiencing the crashes last year, the sentiment is quite vulnerable and pessimistic now,” said Xiao Shijun, an analyst at Guodu Securities in Beijing.
SQUEEZING SPECULATION
China’s currency has fallen around 5 percent since August, and while most analysts expect further weakening the authorities have been loath to allow it to depreciate too fast.
Monday’s move by the PBOC was seen by some as being - at this stage - more of a symbolic warning to banks, aimed at discouraging them from being too active in yuan dealings as part of its broader campaign to deter those betting offshore that the currency will fall.
Setting an RRR - requiring banks to hold a certain level of currency in reserves - could tighten liquidity leaving less yuan for banks to lend and so making it more expensive for speculators to bet against it.
On Friday, the yuan had weakened sharply offshore, opening up a gap of more than 1 percent with the steady onshore market.
China’s central bank tightly manages the onshore market by setting a daily target for the yuan, which is allowed to trade within a 2-percentage point band either side.
The spot market opened at 6.5800 per dollar on
Monday and was changing hands at 6.5790 at midday, 0.08 percent firmer than the previous close and in line with the mid-point, which was set 0.07 percent firmer at 6.5590.
The offshore yuan was trading 0.13 percent softer than the onshore spot at 6.5873 per dollar.
A senior dealer in Shanghai suggested that the RRR move “will help drain yuan liquidity offshore, and will dampen banks’ interest in conducting offshore yuan business”.
Global markets have also tumbled at the start of 2016, with Asian shares sliding on Monday to their lowest levels since 2011 following weak U.S. economic data and sharp falls in oil prices.
China’s major share indexes have lost 16-18 percent so far in 2016, taking them back to around the levels plumbed in August, when the market slumped more than 40 percent in a summer crash.
Xiao Gang, head of the China Securities Regulatory Commission (CSRC), pledged over the weekend to strengthen oversight of the market.
“The abnormal stock market volatility has revealed an immature market, inexperienced investors, an imperfect trading system, and inappropriate supervision mechanisms,” Xiao said at an annual meeting. His remarks were published on the CSRC website.
Reuters
