The yuan reference rate was strengthened to its highest in three months by China, as the currency saw an increase similar to the rates back in 2005, to go up by 0.9 percent against the dollar.
China sells dollar to battle yuan depreciation, currency rises 0.9 percent
China’s foreign reserves were down USD 99.5 billion last month, due to large scale selling of dollars by the central bank in a bid to ease yuan depreciation. It marked the second largest ever drop in China's foreign reserves. According to a Bloomberg report, USD 1 trillion is said to have left Chinese shores in 2015.
According to Zhou Xiaochuan, Governor, The People’s Bank of China, the country is in a good position as far as balance of payments are concerned. The exchange rate has stabilized against a basket of currencies, and capital outflows too are at expected levels.
People’s Bank of China raises daily fixing
The PBOC raised the daily fixing of the yuan against the dollar. The Yuan strengthened, up 0.9 percent to 6.5170 against the dollar. It is the highest rise since July 2005 when the dollar peg was done away with. Offshore rates meanwhile dipped by 0.16 percent to hit 6.5186, winding up at similar levels to the onshore yuan. Only last week, with the markets on the mainland closed for the Lunar New Year, a 1 percent premium was seen. The PBOC had set the yuan at 6.5314 to the dollar ahead of the festive week. Meanwhile, the onshore yuan gains may have been a case of playing catch up to the dollar movement.
The daily midpoint or references rate which sets the 2 percent limit up or down within which the currency is permitted to trade, was increased by 0.3 percent. This hike was the highest since November 2015 when a 0.5 increase was seen.
Governor expresses confidence in currency
Industry experts believe that the move by the central bank was on the back of assessing the way the Euro and Yen would move. They attributed the Yuan being fixed stronger to an anticipation of continued capital outflow. The governor emphasized that there was no reason for the yuan to depreciate against a basket of currencies, so the move to keep it stable. In his view, this reform in yuan exchange will allow the markets to better deal with those speculating on yuan depreciation.
The governor’s address has helped bring much needed confidence among local traders, who echo the sentiment that the yuan value is likely to be in sync with the PBOC fixing for now.