Banks are generally allowed to maintain short or long foreign currency positions in the dollar-yuan markets within specified limits. This new strategy, however, would effectively mean that the companies’ high-value dollar transactions would be absorbed by the banks and remain on their books for a while, thereby partially reducing the pressure on the depreciating yuan.
This policy came out of a meeting held by the PBOC with several commercial banks earlier this week. It also said that companies looking to buy $50 million or more would need to seek approval from the central bank.
The Chinese yuan has weakened more than 5% against the dollar so far this year, making it one of Asia’s worst-performing currencies for 2023.
The weakening of the renminbi is primarily due to China’s low interest rates and the slow domestic economic recovery. The continued decline has resulted in an unbalanced market as exporters retain earnings in dollars rather than convert them into yuan. We recently prepared a comprehensive analysis of the Chinese banking system and its dangers, this article can be read here:
Cover image source: Getty Images