China Warns Traders on Yuan Speculation, Fueling Sharp Rebound

(Bloomberg) — China escalated its defense of the yuan by delivering a strong verbal warning after forceful guidance with its daily reference rate, moves that pushed the managed currency away from a 16-year low.

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The nation’s financial regulators will take action to correct one-sided moves in the market whenever it’s needed and they are confident in keeping the yuan basically stable, the People’s Bank of China said in a statement on Monday. That came a few hours after policymakers set a daily fixing that was stronger-than-expected by a record margin and state-owned lenders were also seen actively selling dollars, according to traders who asked not to be named.

Adding fuel to the yuan’s rebound, China also reported Monday that credit expanded more than expected in August as lenders boosted loans and the government accelerated the sale of bonds.

“Participants of the foreign-exchange market should voluntarily maintain a stable market,” the PBOC statement said. They should “resolutely avoid behaviors that disturb market orders such as conducting speculative trades.”

The onshore yuan jumped about 1%, the most since March, to around 7.27 per dollar.

“This alongside the fixing and the weaker dollar should help ease some of the fears from last week that they could be tolerating some renewed yuan weakness,” said Eddie Cheung, senior emerging markets strategist at Credit Agricole CIB in Hong Kong.

State-owned banks were selling dollars in the morning session and that continued into the afternoon one, according to traders who asked not to be identified as they were not allowed to comment publicly. Then, some lenders began to unwind bullish dollar positions, triggering a wave of so-called stop loss orders, they said.

Weighed by China’s increasingly gloomy economic outlook and interest-rate divergence with the US, the onshore yuan slumped perilously close to the weak end of its 2% fixed trading band versus the dollar last week. Signs of easing factory deflation in August, a positive press report on credit growth and a rally in the yen which weighed on the dollar may also have helped the Chinese currency.

Despite the PBOC’s efforts to support the yuan, many strategists argue the central bank will only aim to slow the pace of declines and is unlikely to do anything too drastic to reverse the weakening trend.

“if the yuan continues to depreciate, the central bank will have to take more action,” said Zhou Hao, chief economist at Guotai Junan in Hong Kong.

–With assistance from Qizi Sun and Ran Li.

(Adds trader comment.)

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