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Global: China Introduces New Policy Measures to Bolster Yuan Stability

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China Introduces New Policy Measures to Bolster Yuan Stability
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China has unveiled additional measures to stabilize its currency, the yuan, which has been under pressure amid global economic shifts. On Monday, the country announced plans to increase dollar reserves in Hong Kong and enhance capital flows by allowing companies to borrow more overseas.

A combination of factors, including the strong U.S. dollar, declining Chinese bond yields, and concerns over potential trade barriers as Donald Trump assumes the U.S. presidency, has pushed the yuan to 16-month lows. In response, the People’s Bank of China (PBOC) has intensified efforts to curb the currency’s decline.

Steps to Strengthen the Yuan

The PBOC has raised limits on offshore borrowings for companies, enabling increased foreign exchange inflows. Additionally, Governor Pan Gongsheng announced at the Asia Financial Forum in Hong Kong that the central bank plans to significantly boost the proportion of China’s foreign exchange reserves held in Hong Kong. While specifics were not provided, this move aims to enhance the yuan’s support mechanism.

China’s foreign reserves stood at approximately $3.2 trillion at the end of December 2024. However, details on the allocation of these reserves remain limited.

According to Lynn Song, Chief Economist for Greater China at ING, “Today’s comments from the PBOC indicate that currency stability remains a critical priority for the central bank, despite speculation about potential devaluation as a response to trade tariffs. Increasing China’s foreign reserves will provide more ammunition to defend the yuan if necessary.”

Currency Challenges and Market Dynamics

The onshore yuan traded at 7.3318 per dollar as of 0450 GMT on Monday, hovering near its 16-month low of 7.3328 reached last Friday. Since the U.S. election in November, the yuan has lost over 3% of its value against the dollar, reflecting concerns about trade risks under Trump administration.

To counteract these pressures, the central bank has been setting its official midpoint guidance on the firmer side of market expectations since mid-November, signaling unease over the yuan’s continued decline.

Additional Measures by the PBOC

In recent days, the PBOC has introduced further steps to manage market dynamics. It has announced a suspension of treasury bond purchases to prevent excessive yield declines and plans to issue significant amounts of bills in Hong Kong to control offshore yuan circulation.

Gary Ng, Senior Economist at Natixis, noted, “While China’s onshore market holds a more substantial pool of yuan deposits, Hong Kong plays a significant role in supporting the yuan through higher turnover driven by FX swaps and spot transactions. This makes Hong Kong a vital hub for trading and investment activities to bolster the yuan.”

Trade and Economic Implications

Recent data shows that China’s exports gained momentum in December, with imports also recovering. However, the spike in exports was partly driven by factories expediting shipments ahead of potential trade risks under the Trump administration.

The PBOC’s latest announcements underscore the challenges it faces in balancing economic growth initiatives, managing bond yields, and stabilizing the currency amid political and economic uncertainties. These measures reflect China’s commitment to preserving financial stability and mitigating risks in a volatile global economic landscape

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