Is China starting to panic?

Having seen their initial attempt at stabilization of the offshore yuan fail, it appears PBOC has resorted to direct influence, reportedly telling some banks on Monday that they should make efforts to prevent ‘herd behavior’ and momentum-chasing moves when trading the yuan.

After  raising FX forward reserve requirements late last week (sparking a brief vertical ramp in yuan), the selling pressure returned, apparently forcing PBOC's hand to 'intervene' again by pressuring banks to avoid betting on further yuan weakness.

Bloomberg reports that, according to people familiar with the matter, PBOC official made the comments in a meeting on Monday morning with the 14 banks that provide quotations of the yuan’s daily reference rates to the central bank:

  • The central bank was confident and has plenty of tools to stabilize the market.

  • China will keep the yuan flexible and allow the currency to move both ways.

  • Any pressures on the yuan will need to be released in a timely manner and China will not work against market forces.

  • Cross-border capital flows are balanced overall, and China’s fundamentals will provide support for a stable yuan.

This move by the PBOC was followed by comments from Guan Tao, a former senior official at the State Administration of Foreign Exchange, who said that the yuan's depreciation has been the result of market factors instead of deliberate government interventions, and there is no sign that the Chinese government is working on a currency war.

"The current weakening of the yuan is a reflection of a change in market sentiment following the change in economic fundamentals," Guan told the Global Times on Monday.

"A short-selling sentiment is behind the relatively fast weakening rate in yuan depreciation," Guan said.

Additionally, offshore yuan was supported overnight after China reported its foreign currency holdings increased last month despite a weakening currency and worsening outlook for exports growth. Reserves rose $5.82 billion to $3.118 trillion in July, the People’s Bank of China said Tuesday. That was higher than all estimates in Bloomberg’s survey of economists, where the median forecast was $3.107 trillion. $1.2 billion of the increase was due to valuation effects, according to Bloomberg Economics.

The shift seems to suggest no attempt by Chinese officials to intervene directly to support the Yuan's freefall (positively spun as a sign that there is no capital flight... yet)...

“The PBOC so far has not directly intervened in the FX market by burning reserves,” said Zhou Hao, senior emerging market economist at Commerzbank AG in Singapore. “So far we have not seen significant capital outflow pressures, but if the yuan drops to 7 per dollar we’ll probably see a fresh round of pressure.”

So China has now intervened (with actions and words) and blame for the yuan weakness is being placed on short speculators - now where have we heard that message before? Next stop, capital controls?