(Yicai Global) Sept. 27 — The People’s Bank of China still has plenty of instruments it can use to stem the Chinese yuan’s weakening against the U.S. dollar and U.S. dollar fundamentals remain strong, analysts said after a further decline in the exchange rate after the central bank yesterday reintroduced the risk reserve requirement ratio for forward currency sales.

The yuan is becoming more flexible to cope with pressures from a buoyant U.S. dollar amid fierce rate hikes by the U.S. Federal Reserve, accelerated global monetary policy tightening and deepening energy crisis in Europe, have said analysts. In the short term, the yuan exchange rate will be under pressure, but the conditions for continued sharp depreciation do not exist.

Yesterday the central bank said it would raise the risk RRR for forward currency sales, which aims to discourage short-term currency speculation, to 20% from zero from September 28. The offshore yuan rebounded to 7.1319 from 7.1601, just two minutes after the central bank’s announcement. It then 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 exchange rate, including but not limited to adjusting the forex RRR ratio and RRR risk for currency forward sales as well as tightening liquidity offshore yuan, said Xie Yunliang, director of macro strategy at Cinda Securities. Yicai Global.

There is no basis for further depreciation of the yuan, said Wen Bin, chief economist at China Minsheng Bank. China’s gross domestic product is expected to rebound significantly this quarter compared to the second quarter, inflation is moderate and controllable, international receipts and payments are in good condition, especially the current account and direct investment and other international payments base are in excess. All this lays the foundation for the flattening of the yuan exchange rate and the stable operation of the foreign exchange market, he added.

There is no reason for the yuan to continue to devalue given domestic fundamentals, international receipts and payments, flexible exchange rate and long-term allocation values ​​of yuan-denominated assets, said Zhou Maohua, a macroeconomics researcher in the finance department of China Everbright Bank. markets.

Next steps

The PBOC will take more countercyclical action in the future, especially next month, as the rising momentum of the US dollar has not waned, she said. It will also continue to issue central bank bills to support the yuan exchange rate by absorbing liquidity moderately in the offshore market. Last week, it issued 5 billion yuan ($697.9 million) of six-month yuan-denominated bills in Hong Kong at a rate of 2.2%.

Further reductions in the forex RRR cannot be ruled out, analysts said. The central bank can also ask financial institutions to slow down overseas investment, for example by spacing out the issuance of quotas for qualified domestic institutional investors, which are Chinese companies licensed to buy foreign securities.

The yuan will continue to move within a reasonable range, and the two-way swings will normalize, Zhou said. As the market gradually digests risk factors against the currency, the country’s economy recovers, and international receipts and payments balance out, the yuan is expected to rally.

Editors: Xu Wei, Kim Taylor