(Yicai Global) Sept. 27 -- The People’s Bank of China still has many instruments it can use to stem the weakening of the Chinese yuan against the US dollar and the redback's fundamentals remain strong, analysts said following a renewed descent in the exchange rate after the central bank reintroduced the risk reserve requirement ratio for forward forex sales yesterday.

The yuan is becoming more flexible to deal with pressures from a buoyant US dollar amid the US Federal Reserve's ferocious rate hikes, global accelerated monetary policy tightening and the worsening energy crisis in Europe, analysts said. In the short run, the yuan exchange rate will come under pressure but the conditions for a continued large depreciation do not exist.

Yesterday, the central bank said it will hike the risk RRR for forward forex sales, which aims to disincentivize short-term currency speculation, to 20 percent from zero starting on Sept. 28. The offshore yuan rebounded to 7.1319 from 7.1601, just two minutes after the central bank’s announcement. It later continued to slide and was trading at 7.1694 at 8.05 a.m. Beijing time today.

The PBOC has many tools to stabilize the yuan's exchange rate, including but not limited to adjusting the forex RRR ratio and the risk RRR for forward forex sales as well as tightening the offshore yuan's liquidity, Xie Yunliang, macro strategy director at Cinda Securities, told Yicai Global.

There is no foundation for the continued depreciation of the yuan, said Wen Bin, chief economist at China Minsheng Bank. China’s gross domestic product is set to rebound significantly this quarter from the second quarter, inflation is moderate and controllable, international receipts and payments are in good order, especially the current account and direct investment and other basic international payments are in surplus. All of this lays the foundation for the flattening out of the yuan exchange rate and the stable operation of the forex market, he added.

There is no basis for the yuan to keep devaluing considering domestic fundamentals, international receipts and payment, the flexible exchange rate and yuan-denominated assets' long-term allocation values, said Zhou Maohua, a macro economy researcher at China Everbright Bank's department of financial markets.

Next Steps

The PBOC will take more countercyclical measures in the future, especially next month, as the rising momentum of the US dollar has not run out of steam, it said. It will also continue to issue central bank bills to underpin the yuan exchange rate by moderately absorbing liquidity in the offshore market. Last week, it issued CNY5 billion (USD697.9 million) worth of six-month yuan-denominated bills in Hong Kong at a rate of 2.2 percent.

Further cuts of the forex RRR cannot be ruled out, analysts said. The central bank may also ask financial institutions to slow overseas investments, such as by spacing out the issuance of quotas for Qualified Domestic Institutional Investors, which are Chinese companies authorized to buy overseas securities.

The yuan will continue to run within a reasonable range and bi-directional fluctuations will normalize, Zhou said. As the market gradually digests risk factors against the currency, the country’s economy recovers and international receipts and payment are balanced, the yuan should recover.

Editors: Xu Wei, Kim Taylor