China’s efforts to counter investor pessimism and stabilize its economy are intensifying as the central bank takes action to support the weakening yuan. In a move aimed at curbing the currency’s decline, the daily reference rate was set stronger than anticipated. This decision followed the suspension of a prominent finance writer and two colleagues from a social media platform for spreading what was deemed as “negative and harmful information” about the country’s faltering stock market.
Despite growing concerns about the economic outlook, the Chinese government has been hesitant to implement significant stimulus measures. It comes as concerns about public finances are growing. Caixin reported this morning that “Local Chinese governments were found to be inflating fiscal revenue, adding new hidden debts and carrying out poor financial management”. As a result, there has been a notable outflow of funds from the stock market, contributing to the yuan’s seven-month low. MSCI Inc’s gauge of Chinese equities has dropped nearly 20% from its peak earlier this year in January.
While some investors may appreciate the government’s attempts to limit losses, it is important to note that the impact of market intervention often proves short-lived and can potentially backfire. Furthermore, restrictions on financial commentary raise apprehension among foreign investors regarding access to unbiased information about Chinese companies and the overall state of the economy.
The decision to set a stronger trading band for the yuan is being seen as a significant step by the People’s Bank of China to address the excessive decline. According to Reuters, sources also indicate that state banks have been selling dollars and buying yuan in the offshore spot market. This activity has been particularly noticeable as the yuan approaches the psychologically important 7.25 per dollar level. Late on Monday, the banks were also active, bidding up the yuan ahead of the onshore close, which influences the central bank’s official yuan midpoint fixing the following day.
*Bottom line: The combination of these measures underscores official unease regarding the downward momentum of the yuan. While they may slow down the currency’s decline, analysts suggest that they may not be sufficient to halt it entirely, given the current gloomy economic outlook.
