PBOC Ready to Intervene to Defend Yuan

China’s central bank is on guard against a sudden attack on the yuan in offshore markets, and is ready to intervene if the gap between offshore and onshore exchange rates becomes destabilizing, sources involved in policy discussions say.

Though the People’s Bank of China (PBOC) wants to avoid a sharp depreciation in the currency, it is comfortable with further weakening of the yuan against the dollar, policy insiders said, especially as the U.S. Federal Reserve is expected to raise interest rates on Wednesday for the first time since 2006.

“An interest rate rise by the Fed could put big pressure on the yuan … so it’s a good thing to allow the yuan to depreciate modestly to help release the pressure,” said a senior economist at a top government think-tank.

But the bank, which devalued the yuan by an initial 2 percent in August when it introduced a market-based mechanism to determine the daily opening rate, was alive to the dangers of more abrupt falls, he added.

“A sharp yuan depreciation is not what the PBOC is happy to see … If that happens, the PBOC will intervene … because sharp yuan falls could fuel capital outflows and financial risks.”

“The government still has various means to manage the yuan exchange rate,” said another influential economist who advises policymakers. “The central bank may still intervene to prevent sharp fluctuations in the yuan exchange rate – on onshore and offshore markets.”

The bank indicated late on Friday that it wanted markets to stop fixating on the dollar-yuan rate, which is at its lowest since July 2011, and launched a new index measuring the yuan, also known as the renminbi (RMB), against a basket of currencies.

“We should use the RMB index to show that the RMB has gained against most currencies, although it has depreciated against the dollar,” said a policy insider at the Commerce Ministry.

via SOURCE

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