SHANGHAI/HONG KONG (Reuters) -China on Monday announced more tools to support its weak currency and unveiled plans to park more dollars in Hong Kong to strengthen the yuan and improve capital flows by allowing companies to invest more to borrow abroad.
A dominant dollar, falling Chinese bond yields and the threat of higher trade barriers when Donald Trump begins his US presidency next week have left the yuan hovering around a 16-month low, prompting the central bank to take action.
The People’s Bank of China (PBOC) has tried other means to halt the falling yuan since late last year, including warnings against speculative moves and attempts to raise interest rates.
On Monday, authorities again warned against speculation against the yuan. The PBOC raised limits on foreign borrowing by companies, ostensibly to bring in more foreign currency.
PBOC Governor Pan Gongsheng, meanwhile, told the Asia Financial Forum in Hong Kong that the central bank will substantially increase the share of Chinese foreign exchange reserves in Hong Kong, without providing details.
China’s foreign reserves stood at about $3.2 trillion at the end of December. Not much is known about where the reserves are invested.
“Today’s comments from the PBOC indicate that currency stability remains a key priority for the central bank, despite the market often discussing the possibility of deliberate devaluation to offset rates,” said Lynn Song, chief economist for Greater China at ING.
“Increasing China’s foreign reserves will provide more ammunition to defend the currency if market conditions ultimately make it necessary.”
China’s onshore yuan was trading at 7.3318 per dollar at 0450 GMT on Monday, not far from a 16-month low of 7.3328 on Friday.
The currency has lost more than 3% against the dollar since the US elections in early November, amid concerns that Trump’s threats of new trade tariffs will further increase pressure on China’s struggling economy.
The central bank has set its official midpoint guidance at the firmer end of market projections since mid-November, which analysts say is a sign of unease about the yuan’s decline.
Monday’s announcements underscore the PBOC’s challenges and its juggling skills as it tries to revive economic growth by keeping liquidity conditions easy, while also trying to stem a runaway bond rally and stabilize the currency at the same time. amid political and economic uncertainty.
In recent days, the country has unveiled other measures. In efforts to prevent interest rates from falling too much and to control the circulation of yuan abroad, the country says it will suspend purchases of government bonds but plans to issue large amounts of banknotes in Hong Kong .