China Strengthens Measures to Defend the Yuan

SHANGHAI (Reuters) – China intensified its policy measures on Monday to support a weakening yuan by relaxing rules for offshore borrowing and issuing verbal warnings, as the currency remained near 16-month lows against a robust dollar.

The yuan has faced renewed depreciation pressures due to a combination of a stronger dollar, declining Chinese yields, and heightened trade tensions with other economies.

The People’s Bank of China (PBOC) announced an increase in borrowing limits, allowing companies to borrow more from abroad. The ratio under its macro-prudential assessments (MPA), which determines how much a company can borrow relative to its net assets, will rise from 1.5 to 1.75, effective immediately.

This move aims to “further improve macro-prudential management of cross-border financing, enhance sources of cross-border funds for businesses and financial institutions, and guide them to optimize their asset-liability structure,” according to a statement from the PBOC in collaboration with the foreign exchange regulator.

Additionally, the China Foreign Exchange Committee aims to maintain a stable yuan exchange rate at reasonable levels. The committee, which operates under the sponsorship of the central bank and foreign exchange regulator, will also focus on increasing market resilience, strengthening management, correcting pro-cyclical market activities, and preventing excess volatility in exchange rates.

In Hong Kong, PBOC Governor Pan Gongsheng stated at the Asia Financial Forum that “China has the confidence, conditions, and ability to maintain a stable foreign exchange market.” He reaffirmed that China will work to keep the yuan exchange rate stable.

These actions are intended to “send a signal to stabilize the yuan,” according to Ken Cheung, chief Asian FX strategist at Mizuho Bank. However, he noted that the actual effects on capital flows and the exchange rate may be limited due to the lower costs of domestic financing.

Cheung indicated that regulators are likely to rely on daily midpoint fixing to stabilize the currency and manage market expectations. The onshore yuan was trading at 7.3315 per dollar as of 0247 GMT on Monday, close to a 16-month low of 7.3328 reached on Friday. The yuan has depreciated over 3% against the dollar since U.S. President-elect Donald Trump’s election in November.

Since mid-November, the central bank has set its official midpoint guidance above the key 7.2 level, stronger than market expectations, signaling concerns over the yuan’s recent declines.

Last week, the PBOC announced plans to sell 60 billion yuan in six-month yuan bills in Hong Kong on January 15, marking its largest such sale since 2018. This sale aims to reduce market liquidity and curb speculative bets against the yuan.