Analysis-After tussle with yuan bears, China now keen to avoid big currency gains By Reuters

SHANGHAI (Reuters) – After spending all year trying to put a floor under the collapsing yuan, China’s central bank is suddenly faced with the opposite problem and is turning to subtle ways to stem the currency’s sharp appreciation.

The usually tight yuan strengthened 1.3 percent against the dollar in August, recovering almost all of its losses in the first half of the year. On Friday, it looked poised for its fifth straight weekly gain, its longest winning streak in more than three years.

While none of the underlying factors, namely a weak economy and capital flight, have changed, the yuan has been helped by growing bets on Federal Reserve interest rate cuts, which weaken the dollar, and a rise in the yen Japanese.

Meanwhile, Chinese authorities have been working behind the scenes to ensure the currency does not rise sharply, which could hurt fragile domestic financial markets and hurt exporters. They surveyed the market to gauge the pressure and quietly eased restrictions on gold imports and yuan trading positions for some banks.

“The government is probably less concerned about depreciation but remains cautious about currency volatility,” said Gary Ng, senior Asia Pacific economist at Natixis.

“While pressure on the yuan may ease as the Fed may finally cut interest rates, there may be sudden and significant movements in capital flows.”

A big reason the People’s Bank of China (PBOC) is worried is the build-up of speculative yuan short positions during the currency’s steady decline since early 2023, which could be untidy if the currency rises quickly.

Foreign companies operating in China, exporters and domestic investors have swapped the yuan for dollars to get better returns in what is known in market circles as the yuan carry trade.

Analysts at Macquarie Group (OTC:) estimate that exporters and multinational companies have accumulated foreign exchange holdings of more than $500 billion by 2022.

“As the yuan appreciates … concerns about the potential trade-off of the yuan and shocks may occur in financial markets,” said Zhu Chaoping, global market strategist at JP Morgan Asset Management.

“Recent market volatility in Japan may have reminded policymakers of these risks.”

China’s currency regulator, the State Administration of Foreign Exchange (SAFE) and the PBOC did not immediately respond to Reuters requests for comment.

PREVENT AN IMPRESSION

Possibly to get a sense of the pent-up yuan purchases that could come as the currency appreciates, SAFE surveyed banks on their clients’ foreign exchange conversion rate – the proportion of revenue exporters convert into yuan – last week , two people with direct knowledge of the matter told Reuters.

“Currency settlement is the issue that everyone in the market is largely concerned about, apart from the Fed’s interest rate cut,” said Liu Yang, general manager of the financial market business department at mineral exporter Zheshang Development Group.

“After all, exports are the only major driver of China’s economy among the traditional ‘troika’ (traditional growth engines), and regulators do not want the yuan to appreciate quickly and substantially to weaken the competitiveness of export products,” he said he.

Separately, guidance given to banks last year barring them from holding short yuan positions at the end of a trading day has also been relaxed for some banks, two people with direct knowledge of the matter told Reuters.

Chinese banks were also given new gold import quotas by the central bank, Reuters reported. Gold imports are usually reduced when the yuan faces depreciation pressures.

The moves are subtle, analysts said, and, along with the trend in the PBOC’s daily benchmark setting for the yuan, simply indicate a desire to limit volatility rather than stem gains.

However, market participants are revising their forecasts for the yuan.

Analysts at BofA Securities expect the yuan to continue to weaken, “given subdued growth and the PBOC’s easing trend,” but see the yuan at 7.38 per dollar by the end of the year, not 7.45 as they had previously forecast . It is currently around 7.14 per dollar.