China's Central Bank Steps Up Yuan Support After Fed Move
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China's central bank has stepped in to support the yuan after the US Federal Reserve's latest interest rate decision sent the dollar soaring, reports Nikkei Asia. The People's Bank of China (PBOC) set the yuan's reference rate at 7.1911 per dollar on Thursday, a stronger level than anticipated by market participants.
This move, marking the widest discrepancy between expectations and the actual reference rate since July, comes after the Fed cut interest rates by a quarter of a percentage point while signaling fewer rate cuts in 2025 than previously anticipated. This unexpected shift prompted a selloff in stocks and a rise in the dollar against most Asian currencies.
The onshore yuan, which had already weakened to 7.2856 per dollar on Wednesday, touched 7.2999 on Thursday morning, its weakest point since September 2023. The offshore yuan, trading more freely, tumbled to 7.3271 against the greenback, its lowest level in over a year.
The PBOC has been actively supporting the yuan since Chinese officials adopted a "moderately loose" monetary policy earlier this month, aiming to bolster the world's second-largest economy. However, the widening interest rate gap between the US and China has put downward pressure on the yuan, prompting concerns about a potential currency crisis.
"If the PBOC allows a sharp [yuan] depreciation in uncharted territory, the regulator will face a tough task in managing [yuan] depreciation expectations, and a misstep could risk an FX depreciation-driven financial market crisis," warned Ken Cheung, director of foreign exchange strategy at Mizuho Securities, in a recent report.
In addition to setting a stronger-than-expected reference rate, the PBOC has also issued fresh warnings to banks about excessive purchases of long-term bonds. The central bank instructed financial institutions to "pay close attention to their own interest rate risk," according to a PBOC-affiliated news publication. This prompted one bank's wealth management arm to suspend trading of long-term treasury bonds, reports National Business Daily.
The yield on China's 10-year treasury bonds, which moves inversely to its price, initially rose in response to the PBOC's warning but subsequently fell again on Thursday morning.