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China rushes to pull back the yuan from a three-year high

China rushes to pull back the yuan from a three-year high

China is trying to rein in the yuan as it surges to three-year highs against the U.S. dollar. A stronger yuan makes Chinese goods relatively more expensive to buyers overseas, and has spurred concerns about the competitiveness of Chinese exports — a major contributor to national economic growth. The Chinese yuan traded little changed against the U.S. dollar Thursday after the People’s Bank of China set the yuan’s daily midpoint at 6.3811 versus the greenback. That marked the second-straight day of weaker fixings, reversing six straight trading days of stronger fixings since May 24, according to data from Wind Information.

The PBOC has tried to allow the market to play a greater role in deter mining the yuan’s exchange rate. But the central bank retains some control through daily midpoint fixings against the dollar, allowing the yuan to move 2% higher or lower from that level. The weaker fix followed the central bank’s announcement late Monday that beginning June 15, financial institutions must increase the ratio of their foreign exchange deposits by 2 percentage points — to 7% from 5% currently. The hike forces banks to retain more of their foreign currency holdings, reducing the amount that could be used to influence foreign exchange rates.

It is the first such hike in 14 years since the previous change in May 2007 — before the financial crisis — economists pointed out. They estimate the move will reduce the amount of foreign currency available for long-term trading by $20 billion. Chinese authorities are trying to keep the economy growing steadily as the world attempts to recover from the shock of the coronavirus pandemic last year. However, Beijing’s monetary policy has diverged from that of the U.S. and major developed economies, making mainland Chinese assets more attractive to global investors. The Chinese 10-year government bond yields about 3.07%, while its U.S. counterpart has a far lower yield of around 1.62%.

China rushes to pull back the yuan from a three-year high, CNBC, Jun 3

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