China is taking steps to stabilize its weakening yuan by increasing reserves held in Hong Kong and allowing companies to borrow more overseas. The People's Bank of China aims to counter the effects of a strong dollar, falling bond yields, and potential trade barriers under the new Trump administration.
China announced new measures to support its weakening currency on Monday. The country plans to increase the amount of dollars held in Hong Kong to bolster the yuan and improve capital flows by allowing companies to borrow more overseas. A strong dollar, declining Chinese bond yields, and the prospect of higher trade barriers under the incoming Trump administration have pushed the yuan to 16-month lows, prompting the central bank to act.
The People's Bank of China (PBOC) has used various methods to stabilize the yuan since late last year, including warnings against speculative trading and attempts to boost bond yields. On Monday, authorities reiterated their warning against speculating against the yuan. The PBOC raised the limits for offshore borrowing by companies, aiming to encourage more foreign exchange inflows. PBOC Governor Pan Gongsheng stated at the Asia Financial Forum in Hong Kong that the central bank would significantly increase the proportion of China's foreign exchange reserves held in Hong Kong, though he did not provide specifics. China's foreign reserves stood at roughly $3.2 trillion at the end of December, with little information publicly available about their allocation. Analysts believe these actions demonstrate the PBOC's commitment to currency stability amidst market discussions about potential intentional devaluation to offset tariffs. The yuan traded at 7.3318 per dollar as of 0450 GMT on Monday, close to its 16-month low of 7.3328 reached on Friday. It has depreciated by more than 3% against the dollar since the US election in early November, fueled by concerns that Trump's trade policy will further strain the already struggling Chinese economy. The central bank has been setting its official midpoint guidance on the stronger side of market projections since mid-November, a sign of its unease regarding the yuan's decline. These announcements highlight the PBOC's multifaceted challenges as it strives to stimulate economic growth through accommodative monetary policy while also managing a surging bond rally and stabilizing the currency in the face of political and economic uncertainty. In recent days, the PBOC has unveiled other measures, including suspending treasury bond purchases and planning to issue large amounts of bills in Hong Kong to prevent excessive yield declines and control the circulation of yuan offshore. Gary Ng, senior economist at Natixis, explained that while China's onshore market has a larger pool of yuan deposits, Hong Kong plays a significant role due to its higher turnover driven by foreign exchange swaps and spot transactions. This makes Hong Kong a potential venue for supporting the yuan through trading activities and investments. Data released on Monday showed that China's exports gained momentum in December, with imports also showing recovery. However, the year-end export surge was partly attributed to factories building up inventories overseas in anticipation of increased trade risks under a Trump presidency.
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