BEIJING (AP) – China’s central bank is trying to contain the surge in its currency’s exchange rate, temporarily reversing its efforts to make the tightly controlled yuan more flexible and market-oriented.
On Monday, commercial lenders were ordered to hold more of their currencies as central bank reserves to limit sales after the yuan hit a four-year high of 6.3674 per dollar American.
The People’s Bank of China is trying to deter speculators after the yuan has risen about 12% against the dollar since May.
The ruling Communist Party said in 2015 that it planned to make the yuan a “freely tradable and freely usable currency” by last year. But he kept the controls in place amid concerns about exchange rate fluctuations and the flow of money into and out of the world’s second-largest economy.
“It seems the PBoC still wants to stick with the idea of liberalizing the exchange rate,” ING’s Iris Pang said in a report.
“But it’s hard to achieve if the PBoC doesn’t like speculators,” Pang said. “A market is made up of FX users and investors, including speculators.”
Monday’s order increased the amount of their foreign currency reserves that banks must keep on deposit with the PBoC from 5% to 7%. The change, the first since 2007, will lock in about $ 20 billion of their $ 1 trillion in foreign exchange, according to Macquarie Group.
The increase is a “strong signal” that policymakers are “increasingly uncomfortable” with the speed of the yuan’s rise, Macquarie said in a report.
The surge in the value of the yuan threatens to make Chinese goods more expensive in overseas markets, hampering the resumption of manufacturing after last year’s drop.
A stronger yuan would make imported oil, iron ore and other raw materials cheaper for Chinese manufacturers following rising global commodity prices. But Monday’s order suggests that regulators are less concerned about this than about financial stability.
In 2017, the central bank tightened trading controls to stop a decline in the yuan’s value after a change in the mechanism used to determine its state-controlled exchange rate sparked a wave of sales.
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