China’s central bank vowed to step up efforts to stabilize the nation’s currency after it dropped toward the lowest level in 15 years amid concern about the strength of the Chinese economic rebound.
(Bloomberg) — China’s central bank vowed to step up efforts to stabilize the nation’s currency after it dropped toward the lowest level in 15 years amid concern about the strength of the Chinese economic rebound.
The People’s Bank of China said late Friday Beijing time that it will adopt “comprehensive measures and stabilize expectations” about the currency. The PBOC will also “resolutely prevent risks of big fluctuations,” it said in its quarterly monetary policy report.
The monetary authority also vowed to increase support for the economy more broadly, as domestic demand is still “not strong.” The latest affirmation of that assessment came Friday morning, with manufacturing activity contracting again in June and other sectors failing to build momentum.
China’s yuan dropped to a seven-month low against the dollar in the wake of that news, taking its declines this quarter to more than 5%. The currency is less than 1% away from a 15-year low seen in November.
“The headlines represent a step-up in terms of PBOC verbal support for the currency and the economy,” Alan Ruskin, chief international strategist at Deutsche Bank AG, said of the central bank’s comments. “The market is now going to expect significant follow-through actions.”
Those could be challenging, he suggested, because a move to lower interest rates to stoke growth could work against efforts to shore up the exchange rate. Twinning credit support with fiscal actions would be helpful, Ruskin said.
In offshore trading, the yuan erased a loss of as much as 0.2% after the PBOC news.
PBOC’s Efforts
Declines in the yuan have persisted even as the central bank showed support by repeatedly setting the daily reference rate stronger than estimates. Chinese regulators are also stepping up scrutiny of currency trading and cross-border capital flows, Bloomberg reported on Thursday.
Duncan Wrigley, chief China economist at Pantheon Macroeconomics, predicted that the PBOC will stand ready to intervene if yuan depreciation is too fast — though it’s willing to see a smooth and steady depreciation.
In its monetary-policy report, the PBOC was hinting at more support for homebuyers and another batch of developer funding to ensure housing project completions, Wrigley said.
The PBOC’s mention of increasing the use of “policy” tools that guide credit towards favored sectors, and a call to increase loans to manufacturing firms “are the kinds of additional targeted stimulus that we are likely to see in the next month or so,” according to Wrigley.
Read more: China Tightens Grip on Markets After Selloff in Currency, Stocks
China’s economy lost more steam in June with the official manufacturing purchasing manager index in contractionary territory for a third straight month.
Speculation about potential policy support has been mounting as the recovery for the world’s second-largest economy loses traction, showing weakness in everything from consumer spending to the housing market, exports and infrastructure investment. The PBOC cut policy interest rates this month for the first time in nearly a year, signaling looser monetary policy. But officials have been slow to introduce anything more comprehensive.
In a further sign of weakness, China’s home sales tumbled in June, snapping a four-month rebound, suggesting the country’s vast property market is far from stabilizing. The value of new home sales by the 100 biggest real estate developers fell 28% from a year earlier, according to preliminary data from China Real Estate Information Corp. released late Friday.
The central bank said it’s necessary to “overcome obstacles, ride the momentum and increase the magnitude of macroeconomic policy adjustment,” without elaborating.
–With assistance from Li Liu, Tom Hancock and Jacob Gu.
(Adds analyst comments in the sixth paragraph)
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