China is starting to unwind some of the extraordinary measures aimed at bolstering its currency, after the yuan’s recent surge in value began taking a toll on Chinese exporters, adding to economic headwinds.
Starting Monday, the People’s Bank of China will scrap a two-year-old rule that made it more expensive for traders to bet the yuan will fall in value, according to a central bank notice sent to commercial banks late Friday.
The move, which ends a deposit requirement on trades called currency forwards, will make it cheaper for companies and investors to buy dollars while selling the yuan, and thereby help rein in the Chinese currency’s steep ascent in recent weeks, traders and analysts said. The step will “fend off macro-financial risks,” said the central bank notice, which was reviewed by The Wall Street Journal.
In addition, according to a separate notice by the PBOC, the monetary authority late Friday also removed the reserve requirement on foreign banks’ yuan deposits, which will release more yuan funds into what’s known as the offshore yuan market in Hong Kong, potentially making it easier for foreign investors to bet against the yuan. That requirement was enacted in January 2016.
Meanwhile, officials familiar with the policy changes said authorities are expected to phase out by the end of month draconian measures put in place late last year to curb China’s outbound investment and stabilize the yuan. Instead, those measures–which many companies complain have resulted in a near-blanket ban on their foreign-investment endeavors–are being replaced by formal guidelines issued by the State Council in August.
Those new guidelines encourage foreign deals in some areas such as technology, while discouraging them in property, sports, entertainment and other sectors. “As situations in the foreign-exchange market improve, it makes sense to withdraw some of those temporary measures,” said one of the officials involved in policy-making.
In dismantling certain controls, Beijing is shifting course in an unprecedented effort started two years ago to keep the yuan from weakening too quickly and to maintain confidence in the world’s second largest economy. To do so, Beijing subjected outbound investments to heavy scrutiny, made betting on the yuan’s decline more expensive for traders, and burned through $1 trillion in foreign-exchange reserves in the past several years.
Its strategies gained traction this year, helped by an unexpected softening of the dollar, causing the yuan to soar and making the currency again a policy headache for the government. So far this year, the yuan has more than recouped all of its 6.6% decline against the dollar last year, and last week alone, it gained more than 1.8%–its biggest weekly advance in almost 12 years.
The surge is starting to drag on China’s export growth, making Chinese goods more expensive and threatening to erode profits for many manufacturers who sell to foreign markets. That further weighs on the economy that, while growing steadily recently, is forecast to resume a yearslong slowdown and is struggling with anemic private investment, heavy corporate debt and frothy real-estate prices.
“It’s really hard to understand why the renminbi is soaring all of sudden,” said Pan Haisong, who runs an international shipping company in the eastern metropolis of Shanghai. Renminbi, or the people’s currency, is another name for the yuan.
Mr. Pan, chairman of the Shanghai Taijing International Freight Co., said many of his exporter clients are feeling the pinch from the rising yuan. “They have reduced their orders for my services,” he said.
Customs data released Friday show that China’s exports increased 5.5% in August from a year earlier, lower than July’s 7.2% rise and the 6% growth forecast from economists polled by The Wall Street Journal. While Chinese manufacturers are expected to continue to benefit from a recovery in global demand, economists said any continued appreciation of the yuan would crimp a further expansion of Chinese exports.
Beijing isn’t looking for a wholesale weakening of the yuan and still retains formidable control of the currency–from limits on the ability of Chinese companies and individuals to take money out to a heavy hand in setting the yuan’s official rate against the dollar. Known as the “fixing,” the daily official rate indicates which way Beijing wants the yuan to go.
On Friday, for instance, the central bank set the fixing weaker than the market had expected, hinting at a desire to control the yuan’s pace of appreciation.
The PBOC deposit notice issued late Friday involves a rule enacted in October 2015 that required banks to set aside reserves with the central bank when dealing in a financial contract known as currency forwards. Under the rule, banks that were buying dollars while selling yuan under a forward contract were required to deposit $20 with the central bank for every $100 traded. The reserve effectively raised the cost of wagering against the yuan.
As of Monday, no deposit will be required for such a transaction, in effect removing a penalty on a tool that many traders and investors used two years ago to bet on the yuan’s decline. “Now the PBOC is basically inviting short sellers in to help stem the yuan’s rise,” said a currency trader in a Shanghai-based bank.
The latest policy twist underscores how hard it is for Beijing to control the currency to its exact liking. Deepening economic ties between the country and the rest of the world have led to greater cross-border flows of funds, inevitably subjecting the yuan to the whip of market forces, despite the government’s penchant for keeping a strong hold on the economy. At the same time, companies and investors look at Beijing’s policy directions for clues as to which way to play the yuan–and then sometimes pour in, driving the currency in one direction.
Even before Friday’s move, the yuan’s recent surge and its impact on the economy had begun to turn some investors cautious. “We’re neutral on the yuan right now,” said Luke Spajic, head of portfolio management for Asia emerging markets at Pacific Investment Management Co.