PBC on guard against abrupt depreciation
China's central bank is on guard against a sudden attack on the yuan in offshore markets, and is ready to intervene if the gap between offshore and onshore exchange rates becomes destabilizing, sources involved in policy discussions say.
Though the People's Bank of China (PBC) wants to avoid a sharp depreciation in the currency, it is comfortable with further weakening of the yuan against the dollar, policy insiders said, especially as the US Federal Reserve is expected to raise interest rates on Wednesday for the first time since 2006.
"An interest rate rise by the Fed could put big pressure on the yuan ... so it's a good thing to allow the yuan to depreciate modestly to help release the pressure," said a senior economist at a top government think tank.
But the bank, which devalued the yuan by an initial 2 percent in August when it introduced a market-based mechanism to determine the daily opening rate, was alive to the dangers of more abrupt falls, he added.
"A sharp yuan depreciation is not what the PBC is happy to see ... If that happens, the PBC will intervene ... because sharp yuan falls could fuel capital outflows and financial risks."
"The government still has various means to manage the yuan exchange rate," said another influential economist who advises policymakers. "The central bank may still intervene to prevent sharp fluctuations in the yuan exchange rate - on onshore and offshore markets."
The bank indicated late on Friday that it wanted markets to stop fixating on the dollar-yuan rate, which is at its lowest since July 2011, and launched a new index measuring the yuan, also known as the renminbi, against a basket of currencies.
"We should use the renminbi index to show that the renminbi has gained against most currencies, although it has depreciated against the dollar," said a policy insider at the Commerce Ministry.
"We should find the yuan's equilibrium exchange rate against the dollar, euro and yen," he added.
A growing problem of the yuan's depreciation offshore - including a 2 percent fall this month alone - is that a wide gap is opening up with the onshore rate, which is partly sheltered from market forces by China's capital controls.
"The gap is not sustainable," said the think tank insider, since it could lead to more capital outflows as trading companies sold dollars offshore to get a better rate.
