Yuan Jumps on Signs of Central Bank Intervention

The yuan jumped to a record high on Friday against the dollar on suspected intervention orchestrated by the central bank, its most explicit action in three months to deter speculators from betting on a fall in the currency.

Frederic J. Brown | AFP | Getty Images

The People's Bank of China (PBOC) offered large amounts of dollars via major state banks, propelling the yuan

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[CNY=X  Loading...      ()   ] to a record high of 6.3294 per dollar, currency traders said.

The yuan pulled back slightly by the close to trade at 6.3484,  but was still up sharply from Thursday's close of 6.3735.

"This is a clear intervention by the government to support the yuan and is in line with the PBOC's recent moves to use the mid-point to prevent the yuan's fall," said a trader at a European bank in Shanghai.

"The move indicates that the government is determined to maintain the stability of the yuan's value in the near term, possibly even let it appreciate slightly."

Weakening export demand and worries about how China will weather a housing market slowdown have cast doubt on 2012 economic prospects. Economists widely expect China's growth next year will pull back to the slowest pace in a decade.

That has put added pressure on the yuan.

Since late September, the central bank had been trying to deter bets for yuan depreciation by setting the daily dollar/yuan mid-point, which determines the starting point for trade, at stronger yuan levels.

The suspected intervention on Friday, an ultra-rare example of the PBOC visibly supporting the yuan, seemed to achieve Beijing's goal. The currency was likely to stabilize between 6.30 to 6.40 at least for the rest of this year, traders said.

On Friday, the PBOC fixed the mid-point at 6.3352 to the dollar, stronger than 6.3421 on Thursday. Trading of the yuan is limited to 0.5 percent either side of the daily mid-point.

Despite the PBOC's attempts to set the yuan's exchange rate higher via the mid-point, a shortage of dollars in the onshore China market and broad dollar strength in global markets have pushed the yuan down to the weaker end of its band nearly every day in December.

That was an unusual bout of weakness for a currency that has largely been on a rising trend since a landmark revaluation in 2005. The yuan is up around 30 percent since the revaluation.

Reverse of Trend

For several years, the yuan has been considered by investors as a sure-fire appreciation bet as China amassed large surpluses from trade and Beijing came under pressure internationally to let the currency rise.

The PBOC has acted to cushion speculation of yuan appreciation from time to time since the 2005 revaluation but has rarely needed to intervene to support the currency.

But some investors are now speculating in the offshore forward markets that the yuan will fall in the near-term as China's exports are buffeted by a weak global economy.

"I'm not too surprised that the PBOC is taking it (dollar) a little lower ahead of year-end," said Andy Ji, currency strategist at Commonwealth Bank of Australia in Singapore.

"USD/CNY is down by 4 percent year-to-date and seems that the PBOC is committed to keep that pace of appreciation even with deterioration in the external environment."

Ren Xianfang, senior China economist at IHS Global Insight, said the downward pressure on the yuan was part of a global move by investors into dollar assets, triggered by debt restructuring risks in Europe and a consequent dollar shortage in the international financial system.

"This is a global problem that is now being reflected in emerging markets worldwide. September was basically a turning point for capital flow for emerging markets," she said, adding that there would likely be a major restructuring in the first quarter of next year and that will make the flight to dollars even more aggressive globally.

Beijing seems wary of sharp swings amid weak external demand and financial market turmoil.

Over the past few weeks, it has leashed the yuan within a tight range around 6.35 per dollar.

During the 2008 financial crisis, it put the yuan mainly in a range of around 6.80 to 6.85 against the dollar and kept it there for about two years.

A dealer said that the central bank's intervention had had the impact Beijing desired.

"Worries over yuan depreciation dispersed quickly, with the market now abundant with dollar liquidity," said the dealer at an Asian bank in Shanghai.

"The yuan is now expected to move mainly around 6.35 in the near term, possibly hitting a high of around 6.30 at the end of this year," he said, echoing the views of many traders.