Yuan to Stay Strong Versus Dollar After PBOC’s RRR Cut, Traders Say
Zhou Ailin
DATE:  Dec 07 2021
/ SOURCE:  Yicai
Yuan to Stay Strong Versus Dollar After PBOC’s RRR Cut, Traders Say Yuan to Stay Strong Versus Dollar After PBOC’s RRR Cut, Traders Say

(Yicai Global) Dec. 7 -- The Chinese yuan is expected to remain strong against the US dollar following the decision by China’s central bank to cut the reserve requirement ratio for most banks for the second time this year, according to currency traders.

The People’s Bank of China said yesterday that it will cut the RRR for major commercial banks by 0.5 percentage point on Dec. 15, releasing CNY1.2 trillion (USD188.5 billion) of liquidity into the interbank system to underpin economic growth.

“Though market interest rates may be lower after the RRR cut, weakening the support for the China-US interest margin for the yuan exchange rate, liquidity stimulus is likely to ease the economic downward pressure and thus provide support for the exchange rate,” Zhang Meng, macro and foreign exchange strategist at Barclays, told Yicai Global.

The offshore yuan weakened slightly against the dollar after the PBOC’s announcement, closing at 6.3735 yesterday. It recovered today. As of 3 p.m. Beijing time, the offshore yuan was 66 basis points firmer at 6.3669, while the onshore redback was up 81 bips at 6.3682.

Zhang said Barclays has maintained its forecast of 6.3 yuan to the dollar for the first half of next year due to robust exports and strong momentum of foreign funds entering China’s stock and bond markets.

“Foreign exchange traders won’t be willing to change their yuan positions after weighing up the pros and cons,” Zhang said.

“If China sticks to its dynamic zero-Covid policy, it may continue to benefit from stable supply chains and the export substitution effect while its high trade surplus is likely to persist for longer,” she added.

The RRR cut is more like liquidity management to partially replace medium-term lending facilities due this month, Zhang noted, saying that CNY950 billion (USD149.2 billion) MLFs will expire on Dec. 15 and are unlikely to be renewed after the RRR cut.

Financial institutions will use the funds released from the RRR cut to supplement long-term capital, the central bank said. Beleaguered China Evergrande Group, a leading homebuilder, said on Dec. 3 that there was “no guarantee” it would have enough funds to repay debt. Zhang suggested the RRR cut will stabilize market confidence.

Editors: Shi Yi, Peter Thomas

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Keywords:   Renminbi Exchange Rate,PBOC,Reserve Ratio