(13 January 2025 – China) After the Chinese Renminbi slid to a record low against the US Dollar in offshore trading, the People’s Bank of China (PBoC) has pledged to strengthen the currency that is compounding a damaging liquidity squeeze for Banks.
The PBoC is recalibrating capital controls, unexpectedly suspending purchases of government bonds in a bid to curb a debt-buying frenzy and committing to more stringent oversight of market disruption to ensure the currency is stable at reasonable levels. The central bank is seeking to intervene more actively to curb with behaviour that may disrupt the FX market to prevent the risk of a large move in the RMB.
The cost of borrowing cash via seven-day interbank pledged repurchase contracts jumped to its highest level since October 2023. It is unclear how the PBoC will fill the significant liquidity gap ahead of Lunar New Year holidays, with Bloomberg estimating the gap has blown out to US$205 billion this month.
“Pressure from US dollar is making it hard for PBoC to deliver easing required. The PBoC isn’t alone in facing this dilemma” commented HSBC Chief Asia Economist, Frederic Neumann.
“For now, Yuan stability remains a priority. However, in the medium term, the success of this strategy will hinge on economic fundamentals” stated OCBC Head of Asia Macro Research, Tommy Xie.