China’s yuan lost ground Tuesday for the first time in two weeks after the central bank relaxed capital controls, sparking speculation the government wants to halt the currency’s recent strengthening.
The People’s Bank of China (PBOC) set the yuan’s daily reference rate lower on Tuesday — the first time it had done so in 11 trading sessions — at 6.5277 to the dollar, down 0.43 percent from Monday.
China allows the yuan to rise or fall two percent on either side of the fixed daily rate to control volatility.
The move came after a financial newspaper controlled by the central bank said Monday the PBOC would no longer require banks to set aside a 20 percent deposit on forward sales of foreign exchange, a rule imposed in 2015.
It said foreign institutions which trade the yuan offshore also no longer need to keep reserves in onshore banks.
The latest moves halted the yuan’s recent march to a 16-month high. It triggered speculation that the central bank may be worried the yuan had risen too much and that an official campaign to stem capital outflows has peaked.
“This is a clear positive step of stepping back on capital controls,” Eddie Cheung, a strategist at Standard Chartered in Hong Kong, told Bloomberg News.
“It can be argued that the recent yuan appreciation was too fast. The yuan may be a bit more rangebound in the near term than one-way as markets digest the impact of the move.”
The head of the PBOC’s Research Bureau, Sun Guofeng, was quoted by Chinese financial media on Monday as saying a stabilising China economy and other positive signs made it necessary to readjust rules.
The measures were first imposed in 2015 after the central bank moved the yuan almost five percent lower in a week in August that year.
The yuan, also known as the renminbi, has been under pressure since late 2015 due to uncertainty about the health of the world’s second-largest economy, massive capital outflows seeking better returns abroad and a sharp rise in the dollar.
The yuan had flirted with slipping past 7.0 to the dollar, a threshold not crossed in more than eight years.
The government responded this year by imposing a series of new requirements making it difficult to move capital offshore. Most of these controls remain in place.
“We expect the RMB to fluctuate further and depreciate against the USD in the rest of 2017, to around 6.7 by the end of this year,” Huatai Research said in an analysis.
“The PBOC intends to avoid one-way depreciation or appreciation, with the target of inducing two-way flexibility.”