Why China’s central bank is shoring up the yuan

BEIJING — China’s central bank has sent a strong signal it wants to keep the Chinese yuan from weakening too quickly against the U.S. dollar, economists said.

For a second time this year, the People’s Bank of China announced Monday it would reduce the amount of foreign currency banks need to hold.

Such moves theoretically reduce the weakening pressure on the yuan, which has tumbled by more than 8% this year to two-year lows against the U.S. dollar.

Chinese authorities typically emphasize the yuan’s level versus a basket of currencies, against which the yuan has strengthened by about 1% over the last three months.

However, Beijing’s latest actions show how important the yuan-dollar exchange rate still is, Nomura’s chief China economist Ting Lu and a team said in a report Monday.

They gave two reasons:

• “First, in a year of the once-in-a-decade leadership reshuffle and with elevated US-China tensions, Chinese leaders especially care about RMB’s bilateral exchange rate with USD because they believe RMB/USD somehow reflects relative economic and political strength.
• “Second, a big depreciation of RMB/USD could dent domestic sentiment and speed up capital flight.”

China’s ruling Communist Party is set in October to select a new group of leaders, while solidifying President Xi Jinping’s power.

Tensions between the U.S. and China have escalated in the last several years, resulting in tariffs and sanctions on Chinese tech companies.

Meanwhile, China’s economic growth has slowed in the last three years, especially with the shock of the pandemic in 2020. Tighter Covid controls this year, including a two-month lockdown of Shanghai, have prompted many economists to cut their GDP forecasts to near 3%.

That economic slowdown has contributed to the weakening yuan, which can help make Chinese exports cheaper to buyers in the U.S. and other countries.

The U.S. dollar has strengthened significantly this year as the U.S. Federal Reserve aggressively tightened monetary policy.

In addition, the greenback — as measured by the U.S. dollar index — has benefited from 20-year lows in the euro and a similar plunge in the Japanese yen.