In a shrewd maneuver that has taken global financial markets by surprise, China’s central bank has employed a clever strategy to bolster the yuan.
Shutting Down Southbound Purchases
China’s central bank, in a confidential directive, has directed domestic banks to curb their outward bond investments. This decisive action centers on limiting the southbound purchases under the Bond Connect scheme. By curbing these purchases, China aims to curtail the supply of yuan offshore, thus reinforcing its value.
The larger intent behind this move is clear – to stymie attempts at shorting the yuan and to ensure its stability against the mighty U.S. dollar. The strategy arrives at a pivotal moment for China, whose financial markets are grappling with losses and significant outflows.
With the economy faltering and investor patience waning, stabilizing the yuan has undoubtedly become a mission critical for Chinese policymakers. The challenges Beijing faces are multifold.
Any aggressive monetary easing could further weaken the yuan, potentially accelerating capital outflows – a situation that China is desperately trying to sidestep.
Ken Cheung, an esteemed strategist at Mizuho Bank, opined that this recent directive could potentially stem the tide of mainland capital exiting through the bond market. Concurrently, these measures might drive offshore yuan yields upwards, further fortifying the renminbi.
It’s essential to take a moment to grasp the gravity of the situation. The yuan has depreciated more than 5% against the U.S. currency this year alone, coming perilously close to its lowest value since the 2008 Global Financial Crisis.
While there has been a minor rally since, market players are keenly watching the offshore yuan’s behavior, with borrowing costs in places like Hong Kong reflecting the tension.
Deterring the Bears
Let’s talk numbers. Through the Bond Connect scheme, mainland institutional investors have purchased Hong Kong-traded bonds to the tune of approximately 426.98 billion yuan ($60 billion).
Interestingly, July recorded a decline in these holdings, witnessing a drop of 24.6 billion yuan month-on-month.
While these figures may not seem gargantuan in the grand scheme of things, given the context of China’s aggressive measures against short sellers, the move has considerable symbolic significance.
To complement this effort, the central bank has also been discreetly guiding banks away from subscribing to Negotiable Certificates of Deposit (NCDs) put forth by offshore banks.
This is yet another strategy to diminish offshore yuan trade, as China seems resolute in its commitment to defend its currency. An insider commented on these measures as a decisive blow against foreign yuan detractors.
Additionally, the past weeks have witnessed China’s central bank actively engaging in yuan bill sales in Hong Kong. This move, alongside others, is seen as a tactical play to tighten liquidity in offshore markets, further stabilizing the yuan.
It’s evident that the battle for the yuan’s stability is being fought on several fronts.
With China’s central bank setting the yuan’s trading band consistently above market expectations and state-owned banks accumulating yuan in both onshore and offshore foreign exchange markets, the message is clear.
China, in its characteristic audacious style, is leaving no stone unturned to defend its currency’s integrity. As global observers watch, the ongoing tussle between China’s economic strategies and market forces promises more twists and turns in the days to come.