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Chart: China’s Yuan Extends Advance as Reopening Bets Boost Sentiment

Source : Blomberg

Yuan Jumps to Fifth Most Traded Currency as China Opens Markets

Colleen Goko wrote . . . . . . . . .

The yuan leaped over the Australian, Canadian and Swiss currencies to become the fifth most traded currency in the world, according to the Bank for International Settlements’ Triennial Central Bank Survey.

The Chinese currency was involved in 7% of all trades in 2022, compared with 4% three years ago, Basel-based BIS said in a report on Thursday. Meanwhile, total daily trades rose 14% to $7.5 trillion.

The dollar maintained its decade-long place as the world’s most traded currency, accounting for one side of 88% of all transactions. The euro, yen and pound also held their spots in the top four.

The yuan is becoming a more important global currency as China takes steps to open its financial markets. This is reflected in an increase in yuan cross-border settlements as well as a higher share of yuan among global FX reserves.

The BIS collected data from more than 1,200 banks and dealers in 52 jurisdictions. Russia, which accounted for less than 1% of the global total in 2019, was excluded this year and Dubai was included for the first time.


Source : BNN Bloomberg


Read also at Global Times

Chinese yuan becomes 5th most traded currency in global FX market, a rise of three places compared with 2019: report . . . . .

Charts: Offshore Yuan Rebounded Sharply from a Record Low Last Week

Major Chinese state-owned banks conducted dollar-selling in both onshore and offshore markets to support the ailing yuan.

Source : Trading Economics

Cross-border Settlement of Yuen Surged in 2021

China’s 13-year push for greater international use of its currency is suddenly gaining traction. The yuan now accounts for nearly half of China’s domestic and foreign currency cross-border settlements, and foreign governments and businesses are coming increasingly to consider it as an alternative to the U.S. dollar.

Cross-border yuan settlements surged 29% to 36.61 trillion yuan ($5.12 trillion) last year compared with 2020, according to the People’s Bank of China’s (PBOC). Such payments are likely to continue rising this year after climbing 15.7% year-on-year in the first half, the central bank said.


Source : Caixin

Yuan at the Mercy of Overseas Traders Puts China on Alert

The onshore yuan is on track for a seventh month of losses, and things could get even worse for its less-regulated offshore exchange rate as China goes on a one-week holiday.

The currency traded in Shanghai is matching a record run of monthly losses set during the height of the US-China trade war four years ago. Its realized volatility this week spiked to a level unseen since 2020 as the exchange rate was buffeted by the dollar’s surge and Beijing’s steps to resist yuan weakness.

Next week, the offshore yuan — which is subject to less control by the central bank — loses an important anchor. With mainland markets closed for the Golden Week holidays starting next week, Beijing won’t be able to guide investor expectations with its daily reference rate, which is set each morning by the central bank and limits onshore yuan moves to 2% on either side. That would make the overseas yuan even more vulnerable to the dollar’s surge.

China’s central bank appears to be girding itself for any disorderly trading next week. The People’s Bank of China set the fixing at a stronger-than-expected level for the 27th day, the longest run of stronger fixings on record since Bloomberg started the survey in 2018. It also asked major state-owned banks to be ready to sell dollars to prop up the yuan overseas, Reuters reported Thursday citing people with knowledge of the matter. That’s after issuing strongly-worded statement on Wednesday to deter currency speculators.

That’s because some of the largest deviations between the onshore yuan’s closing price and the offshore unit have occurred when Chinese markets were closed for a holiday. The offshore yuan traded 890 pips weaker than its onshore counterpart on the May 3 Labor Day holiday, the largest gap this year. Trading during the mid-Autumn festival holiday in September 2015 was particularly volatile as the currency deviation exceeded 1000 pips.

“The PBOC is trying to bring some stability to the market, but the problem is that the dollar is too strong,” said Geoffrey Yu, senior FX strategist at Bank of New York Mellon. “If the US data remains strong, there’s not much central banks can do to stop the dollar rally.”

The central bank’s measures so far have only slowed yuan losses. That’s because China’s monetary policy is diverging further from the US, driving outflows. While the Federal Reserve retains a hawkish stance in its efforts to curb US inflation, Beijing is keeping an accommodative policy amid signs the Asian economy is cooling due to Covid lockdowns and a housing-market crisis.

Earlier this week the PBOC imposed a risk reserve requirement of 20% on currency forward sales by banks to make it more expensive to short the yuan. That’s after a move to reduce the foreign-currency reserve requirements for banks.

While the PBOC has other tools at its disposal to stem yuan losses it may be holding back from doing so for now as may be focusing on slowing the pace of the depreciation rather than defending a specific level. The yuan is also holding relatively steady against currencies of its 24 major trading partners, data from a Bloomberg real-time tracker of the CFETS RMB Index show. A weaker yuan isn’t necessarily bad for China as it could make the nation’s exports more competitive and aid in boosting the economy.

Bearishness prevails in the derivatives market. Traders added the most short yuan options this month so far this year, with the nominal value of bearish wagers standing at about four times the size of bullish bets, Bloomberg-compiled data show. Three-month risk reversals, which measure the cost of hedging against offshore yuan losses, jumped to the highest since May this week.

The offshore yuan will remain at the mercy of the dollar in the coming week, said Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore. The currency that trades in Shanghai may retest 7.25 per dollar into next year.

“It is not really the yuan’s fault,” he said. “The dollar is simply too strong.”


Source : BNN Bloomberg

What Does The Yuanization Of The Russian Economy Mean For The Dollar?

By The Jamestown Foundation . . . . . . . . .

On September 12, Russian President Vladimir Putin stated that, given mounting economic sanctions, full “de-dollarization” of the Russian economy is only a matter of time. Putin`s remark was preceded by a statement from Russian Deputy Finance Minister Alexey Moiseev, who argued that “Russia no longer needs the US dollar as a reserve currency.” Instead, Russia must accumulate funds in currencies of so-called “friendly countries,” such as the Chinese yuan, which is playing a key role in this regard. The idea of departing from the US dollar as a reserve currency is by no means new to Russia: It was first entertained in the 1990s. By 2018, Moscow had devised a “plan on the de-dollarization” of its economy. Prior to the outbreak of Russia`s war against Ukraine on February 24, Dmitry Medvedev stated that, if the Kremlin`s operations with US dollars were to be restricted, Moscow could fully switch to the yuan and euro instead. However, following Russia`s attack on Ukraine, the United States, the European Union, and other large economies have effectively barred Moscow from using their national currencies. As a result, aside from the Turkish lira, the United Arab Emirates` dirham and the Indian rupee—each of which cannot be fully relied on due to a number of factors—Russia has been reduced to the use of the yuan as an alternative reserve currency to the US dollar and euro.

Growing popularity of the yuan in Russia reached an intermediary zenith in August 2022, when sales of the Chinese currency skyrocketed. Importantly, business giants, including Rosneft, Rusal, Polus and Metalloinvest, dramatically increased their investments in yuan bonds. As stated by Alexander Frolov, deputy director of the National Energy Institute, it makes perfect sense for Rosneft (and other resource-producing companies) to strengthen cooperation with the Chinese side via increasing the yuan’s use in their operations.

Yet, while many Russian experts and officials are applauding the decision to increase the yuan’s use in financial operations, other experts and officials share serious doubts and concerns. For instance, during the Moscow Financial Forum, Russian Minister of Finance Anton Siluanov and Maxim Oreshkin, current economic adviser to Putin, disagreed on the yuan’s role as a reserve currency. While the former stated that currencies of foreign “friendly countries” should become a key factor in diversification of assets, the latter disagreed, arguing that all monetary reserves must remain in Russia’s national currency. Interestingly, even one of Russia’s main proponents for “de-dollarization,” Andrey Kostin, chair of the VTB Bank management board, speaking at the Eastern Economic Forum (September 5–8) in Vladivostok, argued that, while there are many positive aspects related to the use of the yuan, other negative aspects reveal the risks of overreliance on the Chinese national currency, which is stipulated by “distinctive features of Chinese financial legislation”.

From his side, well-known Russian economist Stanislav Mitrakhovych indicated three main risks Russia could face when increasing reliance on the yuan. First, the Russian Federation does not have the necessary skills and infrastructure to work with the Chinese currency. Although manageable over the long term, for now, the Russian financial system is ill-equipped and largely unprepared for the challenges of relying more on the yuan. Second, a high level of nonmarket regulations will make the process incredibly difficult. Unlike Russia’s previous experience of dealing with foreign currencies—both the US dollar and euro are currencies of free-market economies—the yuan’s price is regulated by the Chinese state. Thus, when in need, Beijing can easily manipulate the price of the yuan (say, to create favorable conditions for foreign trade). This could leave Russia as a “hostage” to Chinese interests. Third, despite China’s growing trade power and economic might, the yuan has not yet become a fully independent currency, remaining tight to other leading global currencies. Thus, it should be remembered that—at least in the short term—the yuan will still be tight to the US dollar, meaning that the Chinese national currency might become an excellent investment tool for the future. For now, however, “making a bet solely on yuan could be a risky enterprise”.

Other Russian economists have also drawn attention to the fact that operations with the yuan could pose multiple risks. For instance, even ultra-conservative Russian information outlets have argued that the People’s Bank of China (PBC) could easily devalue China’s national currency, which could result in serious challenges for Beijing`s partners who are investing in the yuan. Thus, despite its decreasing volatility, the yuan remains a somewhat challenging investment tool, whose exchange rate is almost fully dependent on the PBC. Interestingly, now—only after Russia was barred from operations with the US dollar and euro—Russian economists are starting to realize that it is much safer and more beneficial to work with transparent reserve currencies. For instance, Sofia Donets, an economist at Renaissance Capital specializing on Russia, complained that, if before, Russian economists and finance experts could easily access and read all regulations in “plain English,” now, working with the Chinese side, regulations are opaque and unclear.

In truth, some of the challenges feared by Russian economists and finance experts regarding Russia’s growing involvement with the yuan are coming true. The Russian side has been compelled to admit that Moscow’s inquiry to China to strengthen their partnership in the realm of financial cooperation has not been strongly supported by Beijing. In effect, Chinese authorities are unwilling to change domestic regulations to allow its investors to operate with Russia-issued bonds. Instead, China is more comfortable with foreigners investing in its so-called “panda bonds,” which are sold only in the internal Chinese market. Moreover, Russian experts fear that, with 17 percent of foreign exchange reserves in yuan, the Kremlin will not be able to pull money promptly when needed, thereby becoming trapped by China.


Source : Oil Price

China’s State Banks Told to Stock Up for Yuan Intervention

Julie Zhu wrote . . . . . . . . .

China’s central bank has asked major state-owned banks to be prepared to sell dollars for the local unit in offshore markets as it steps up efforts to stem the yuan’s descent, four sources with knowledge of the matter said.

State banks were told to ask their offshore branches, including those based in Hong Kong, New York and London, to review their holdings of the offshore yuan and ensure U.S. dollar reserves are ready to be deployed, three of the sources, who declined to be identified, told Reuters.

The simultaneous selling of dollars and buying of yuan could put a floor under the Chinese currency, which has lost more than 11% to the dollar so far this year and looks set for its biggest annual loss since 1994, when China unified its official and market rates.

The scale of this round of dollar selling to defend the weakening yuan will be rather big, one of the sources said.

The People’s Bank of China did not immediately respond to a Reuters request for comment.

While the yuan’s depreciation has been gradual and in line with the decline in major currencies against a dollar buoyed by aggressive Federal Reserve monetary tightening, its decline to the weaker side of 7-per-dollar has raised concerns about domestic sentiment and potential capital outflows.

The offshore yuan moves in lock-step with the onshore unit, but its trading volumes account for about 70% of all yuan FX trades globally, dwarfing the volumes traded on the mainland.

Chinese authorities have intervened in the past in the offshore yuan market to steer the yuan.

Sources said the intervention plan involved using state lenders’ dollar reserves primarily. But the total amount of dollar selling is yet to be determined as the yuan’s movements are largely dependent on dollar moves and the Fed’s tightening trajectory, the source said.

China burnt through $1 trillion of its official FX reserves (CNFXM=ECI) to prop up the currency after a one-off 2% devaluation in 2015 that roiled global financial markets.

State banks, which usually act as the PBOC’s agents in offshore markets, are scrambling to procure more dollars in offshore markets, one of the sources said.

The People’s Bank of China did not respond immediately when asked by Reuters about state banks stocking up on dollars.

The latest proposal follows other steps authorities have taken to put a floor under the yuan, through persistently setting firmer-than-expected mid-point fixings, verbal warnings and holding off major monetary easing efforts.

The PBOC has also rolled out policy measures this month, such as increasing the cost of shorting the currency by lowering the amount of foreign exchange financial institutions must hold as reserves and reinstating risk-reserve requirements on currencies purchased through forwards.

Earlier this week, Chinese monetary authorities told local banks to revive a yuan fixing tool it abandoned two years ago as they sought to steer and defend the weakening currency.


Source : Reuters

Chart: Yuan’s Cross-border Settlements Grew in 2021

China’s currency gained traction globally in 2021, with cross-border yuan settlements growing 29% by value from the previous year, a central bank report shows.

The growing use of the yuan across borders indicates that China’s years-long effort to promote the currency’s use globally — including through its own Cross-Border Interbank Payment System (CIPS) — is paying off.


Source : Caixin

Chart: The Offshore Yuan Depreciated Past 7.2 per US$ in September 2022

Sinking to its lowest levels since data on offshore trading became available in 2011

Source : Trading Economics

China Holds Key Rate, Withdraws Liquidity Amid Yuan Defense

China’s central bank drained liquidity from the banking system for a second straight month while leaving rates unchanged as it sought to ease pressure on the yuan from a widening policy divergence with the Federal Reserve.

The People’s Bank of China offered 400 billion yuan ($58 billion) via its medium-term lending facility, matching the median forecast in a Bloomberg survey. That would result in a net withdrawal of 200 billion yuan in September. The rate was held at 2.75% after being lowered by 10 basis points in August.

PBOC caution on easing comes amid heightened concerns over capital outflows after US inflation data renewed bets for a large Fed hike this month. It also follows data that showed a slow recovery in China’s credit growth last month, which may have reduced the urgency for back-to-back rate cut while the impact of other measures to support the economy take effect.

“It would be quite rare for the PBOC to cut rates consecutively except in a crisis mode,” said Xiaojia Zhi, economist at Credit Agricole CIB in Hong Kong. “Looking ahead, we think the PBOC could be hesitant to adjust the MLF rate lower in the near term, given expectations for rapid tightening by the Fed and the depreciation pressure on the yuan.”

Jitters over a diverging monetary policy with the US have already put the yuan on track for its worst annual loss since 1994. The PBOC set a string of stronger-than-expected yuan fixings and reduced banks’ foreign-currency reserve requirement to support the currency. The yuan still remains within striking distance of a two-year low touched last week.

Tighter liquidity could reduce the downward pressure on the yuan. It may also somewhat ease concerns that the excess cash in the banking system would increase financial risks by fueling asset bubbles.

It makes sense for the PBOC to drain some excess liquidity via the MLF operation as it has relied more on the use of structural monetary policy tools, said Winson Phoon, head of fixed income research at Maybank Securities Pte Ltd. in Singapore. The central bank will provide more than 200 billion yuan in special relending funds, the State Council announced after a meeting Tuesday.

PBOC officials have signaled they have enough monetary policy room to act to support the economy amid subdued inflation. Deputy Governor Liu Guoqiang said this month policy space is “ample” and the toolbox is sufficient, both in terms of price-based and quantity-based instruments.

Yields on China’s 10-year government bonds are little changed at 2.66% on Thursday after rising in the last two sessions. The onshore yuan fell 0.1% to 6.9704 as of 3:40 p.m. local time.

Growth Headwinds

China’s growth projections have come down steadily since March, when the official target of around 5.5% was first disclosed. The consensus in a Bloomberg survey is for the economy to expand 3.5% this year. Growth is not only pressured by lockdowns but a housing market collapse is also also weighing on the economy.

Moreover, official data for August, due to be published on Friday, will likely show little improvement in industrial output, retail sales and investment. That’s prompting some analysts to bet on further central bank easing this year.

The PBOC still has room to inject more liquidity in the fourth quarter, with the potential for a 50 basis points cut in banks’ reserve requirement ratio to accommodate local government bond issuance and to partially replace MLF funding, Credit Agricole’s Zhi said.

Analysts are now watching if banks would lower their loan prime rates next week after major state-owned banks cut deposit rates for individuals.

“It provides more policy room for banks to lower LPRs,” said Liu Peiqian, chief China economist at NatWest Group Plc, who sees a higher chance of another 5-10 basis point cut in the five-year LPR in the coming months to boost the demand for mortgage loans.


Source : BNN Bloomberg