The People’s Bank of China pushing YUAN higher – to stem capital flight

The Chinese DO manipulate their currency, and in this case they are manipulating it higher. My theory about why they are doing this is different than the Wall Street Journals, but their perspective on this is equally interesting.

I’ve included their article below. My theory about why they are doing this revolves around the amount of capital that flies out of China — every time the YUAN starts to depreciate.

By Saumya Vaishampayan and Shen Hong

The Wall Street Journal, June 01, 2017

China’s central bank guided the yuan to its biggest one-day jump in roughly five months Thursday, the latest sign that authorities are seeking to bolster the yuan in the wake of the downgrade of the country’s sovereign debt by Moody’s Investors Service last week.

The yuan fix was 0.8% stronger than Wednesday’s, as China set the dollar’s daily midpoint for trading at 6.8090 yuan, compared with 6.8633 yuan. It was the yuan’s highest level since Nov. 10.

The jump wasn’t entirely surprising, traders said: The yuan ended onshore trading Wednesday at 6.8210 to the dollar, its strongest point since Nov. 11, after a 0.6% surge that day.

Commerzbank’s model had predicted the fix would set the dollar at 6.8136 yuan, while a Shanghai-based senior trader with a domestic bank said his own model expected a fix of about 6.8100.

In setting the daily fix, the People’s Bank of China considers where the yuan ended against the dollar in the previous day’s onshore trading, the overnight movement of a basket of currencies and a “countercyclical” factor that was unveiled last week.

Within China, the yuan trades in a tight band around that fix. In theory, it trades freely offshore, in major hubs like Hong Kong.

The central bank has intervened in the onshore market in recent days, traders say, directing state-owned banks to buy yuan and sell dollars. Without that, the yuan wouldn’t have become so strong, said the Shanghai-based trader.

“The key question for everyone now is when the PBOC will let this round of appreciation end,” the trader said. “These are quite uncertain times for yuan traders.”

As to why the PBOC is propping up the yuan, analysts say there are several theories. It could be meant to deter investors from betting the yen will decline following the Moody’s downgrade.

Or it could be to help make China’s domestic bonds more attractive to foreign investors: The central bank has approved a bond-connect program between the mainland and Hong Kong.