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Currencies

Yuan's internationalization stumbles as China keeps stepping in

Central bank aggressively defends the currency against mounting uncertainties

An employee reaches for a bundle of 100 yuan banknotes at a Bank of China branch in Hefei, Anhui Province.   © Reuters

SHANGHAI -- Over the past weeks, China has been managing the yuan with a firmer hand to fend off increasing downward pressure, a course that shows how far it has to go to become the international currency that Beijing envisions.

Saturday marks three years since a shock devaluation of the Chinese currency triggered a plunge in stocks, currencies and commodities. Since then, China has made some progress on its stated goal of internationalizing the yuan, also known as the renminbi.

But this month has seen monetary authorities exert pressure on the foreign exchange market multiple times to defend the yuan. The currency neared 6.9 yuan to the dollar at the start of August, marking a retreat of 9% from a high reached in April.

The People's Bank of China on Monday warned 14 major lenders to prevent "herd behavior" in currency trading, fearing that selling in the yuan will beget more selling. Three days earlier, the PBOC told banks it would impose a 20% reserve requirement on trading in foreign-exchange forward contracts for selling the yuan -- a move that in effect raises the cost of betting against the currency.

Zhou Xiaochuan, the central bank's long-serving ex-governor, told an audience here Saturday that "in the longer view, the internationalization of the renminbi is still promising."

The process is not "linear," Zhou said. "It will move faster when there are opportunities to do so. Sometimes, it will move more slowly."

Many observers reckon that Chinese authorities now have the yuan in a comfortable range and have shifted emphasis to holding it steady.

In response to the 2008 global financial crisis, Beijing reimposed a fixed peg at around 6.8 yuan to the dollar for two years, after which the currency was allowed to float again within limits.

If Beijing can tame the yuan at 6.7 to 6.8, it will show both China and the world it still wields a powerful influence over the currency, a trader at an international bank said.

But the yuan faces no shortage of factors driving it down, as multiple Chinese companies face redemption of dollar-denominated bonds, the economy experiences a slow down and the interest rate gap with the U.S. narrows. The PBOC's defensive moves this month appear to have had little effect, judging by the currency's dip to a one-week low of 6.85 to the dollar on Friday.

The authorities have plenty of means at their disposal to push back, however, should they choose to do so. Squeezing liquidity in the Hong Kong offshore market would made it harder for yuan short-sellers to operate. Reintroducing policies deployed in 2017 to bolster the currency is also possibility, as is bringing back stricter capital controls used in the past.

But the more China tightens the leash on its currency, the further it moves away from true international reserve status. A key achievement toward this goal was joining the basket of currencies that make up the International Monetary Fund's special drawing rights -- a global reserve asset -- in 2016.

Yet China's yuan policies have held back further progress. According to the IMF, the yuan accounts for less than 1.4% of global foreign-exchange reserves and under 2% of global payments. 

China "knows what it needs to do to raise the yuan's status," a former senior PBOC official says. "But the environment is not conducive."

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