The Chinese central bank has somewhat succeeded in reviving investor confidence in the currency, as yuan volatility had previously fallen to nine-month low on stability bets.
A gauge to measure fluctuation in Chinese renminbi that also prices options, fell to 4.6%, reflecting a decline of 13 basis points, as of 12:00 PM in Hong Kong, as reported by Bloomberg. This was the lowest level since November, mainly due to falling bearish bets against yuan.
In the past few weeks, the People’s Bank of China has managed to break its weakness bias by boosting daily reference rate against the dollar. Market sentiments have improved among currency traders at least for the near term. Analysts believe the market is reassessing views on yuan, following the PBOC move to defend 6.7 a dollar level.
China’s bond market has also provided support to yuan’s stability. Due to falling risk appetite among investors, cash inflows have been recorded in the country’s bond market. Offshore investors are putting cash in Chinese bonds that could lead to capital inflows and support the currency in the second half of the year.
According to official data, foreign investors boosted their share in the country's bonds to $48.5 billion (321.9 billion yuan) in July for the ninth consecutive month.
Beijing, however, needs to fulfill its commitment of stable currency to retain confidence — which it has managed to do so far. The Chinese central bank also strengthened yuan fixing to 6.6406 against greenback, marking an increase of 38 basis points. In the Shanghai spot market, yuan remained steady and was trading at 6.6466 per dollar, as of 2:20 PM local time.
Ahead of yuan's inclusion in IMF's basket of currencies in October, PBOC will likely keep the currency stable to support internationalization of renminbi. Any devaluation would be small and gradual.
The policy has some downsides as well. A stronger yuan would keep weighing on the country’s falling exports that partly led to a slowdown in the economy. Economists have reason to believe that China needs to devalue yuan to support exporters in an attempt to revive the economy. In the second quarter, Chinese economy grew 6.7% on year-over-year basis — thanks to the liquidity in economy.
Since February, the Chinese monetary authority has been injecting funds on a daily basis to support growth in the economy. The authority, today, added $13.54 billion (90 billion yuan) in the economy by auctioning seven-day reverse repos. On a weekly basis, PBOC drained nearly $24.30 billion (161.5 billion yuan) against net injection of $48.91 billion (325 billion yuan) last week.