(Bloomberg) — China’s central bank is asking financial institutions and companies to step up management of exchange rate risks and refrain from one-way bets on the yuan after the currency surged to a six-year high against a basket of peers.
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China’s currency may become more volatile in the future as offshore central banks begin adjusting their monetary policies, with two-way volatility of the yuan expected to be “the norm,” according to a statement posted on the website of the People’s Bank. from China.
“In the future, the exchange rate of the renminbi (the yuan) may rise or fall,” said the statement about a meeting of the China Foreign Exchange Commission, an industry body whose membership includes representatives from regulators and financial institutions. .
Central Bank Vice Governor Liu Guoqiang also attended the meeting, a high-level forum sponsored by the country’s central bank and the largest forex regulator. The group last met was in May, days before the People’s Bank of China raised the amount of foreign currency banks must hold as reserves for the first time in more than a decade. The rise curbed the yuan’s appreciation at that time.
The latest warning came as the yuan climbed to its highest level since 2015 against a basket of trading partner currencies earlier this week after the dollar rose. Analysts said the rise was driven by China’s trade surplus and prospects for lower US tariffs.
The People’s Bank of China (PBOC) set the daily yuan fixing rate at 6.3825 on Friday, roughly in line with the average estimate of 6.3822 by analysts and traders polled by Bloomberg. The offshore yuan was little changed at 6.3853 as of 11:35 a.m. in Shanghai.
“The warnings from the FX regulator are something the market should take seriously,” said Zhou Hao, senior emerging markets economist at Commerzbank AG. “Under any circumstances, the risk of a one-way market is that the breakup, once it does occur, could be runaway.”
Qi Gao, Asia FX strategist at Scotiabank, wrote in a note that China’s central bank will set the yuan’s reference rate to the dollar “with an upward slope” if necessary to prevent any unilateral speculation about yuan revaluation. However, he maintains his expectations that the USD/RMB may move towards 6.35.
Shenzhen-based China Merchants Securities said in a research note that an appreciation of the yuan brings far more benefits to the Chinese economy than harms and players in the foreign exchange market should prepare for the yuan’s appreciation in the medium to long term as the dollar continues to weaken.
The official statement, which was also published on the front page of the People’s Bank of China-backed Financial News on Friday, noted that the yuan’s exchange rate is affected by “many” factors because the current global economic and financial situation is “complicated and volatile.”
“Only by adhering to the concept of risk neutrality, companies, financial institutions and other market subjects can better deal with external shocks,” she added, adding that financial institutions should refrain from speculative activities or help companies speculate in the foreign exchange market.
(Adds background on the recent rise in FX RRR in fourth paragraph)
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