Can PBOC measures prevent yuan testing 7 per dollar?

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PBOC Measures Aim to Slow Yuan Depreciation Amidst Expert Skepticism

Recent policy adjustments by the People's Bank of China (PBOC) are intended to moderate the rapid depreciation of the yuan against the US dollar. These measures include a reduction in the foreign exchange reserve requirement ratio for financial institutions and the setting of firmer-than-expected yuan midpoint guidance rates. However, market analysts hold divergent views on the effectiveness of these actions, with some anticipating the yuan will test the psychologically significant 7 per dollar level in the coming weeks.
PBOC Implements Policy to Stabilise Yuan

The PBOC has introduced measures aimed at slowing the yuan's rapid fall. Notably, the central bank announced a cut to the amount of foreign exchange reserves that financial institutions are mandated to hold. This move, alongside the consistent setting of stronger-than-market midpoint guidance rates, signals an official effort to stabilise the currency. In August, the onshore yuan experienced a decline of over 2 per cent against the dollar, influenced by a strong dollar and a domestic economic slowdown.
Expert Opinions Divided on Effectiveness

While the PBOC's actions demonstrate a clear intention to stabilise the yuan, particularly against a strengthening US dollar, their sufficiency remains a subject of debate. Becky Liu, head of China macro strategy at Standard Chartered, described the recent measures as "insufficient" to engineer a significant turnaround, projecting that the yuan could test the 7 per dollar mark soon. This sentiment is echoed by other major investment houses that have revised their yuan forecasts downwards, with some expecting a breach of the 7 level before the upcoming Party Congress.
Market Interpretations of PBOC's Stance

The PBOC set the yuan's midpoint guidance rate at 6.9096 on Tuesday, a level weaker than the previous day's fix but still firmer than market projections for the tenth consecutive trading day. Analysts at Goldman Sachs suggest that the PBOC may have a degree of tolerance for further yuan depreciation, particularly as the broader US dollar continues to strengthen. However, they also believe the central bank would prefer to avoid a prolonged and excessively rapid one-way depreciation.
Yuan Performance and Future Outlook

The onshore yuan rebounded on Tuesday from a more than two-year low of 6.9445 per dollar. As of 0248 GMT, it was trading at 6.9355. On a trade-weighted basis, as measured by the CFETS index, the yuan has eased only slightly over the same period, falling 0.08 per cent in the three weeks prior. Despite these efforts, Nomura's chief China economist, Ting Lu, anticipates further downside, forecasting the yuan to trade at 7.2 per dollar by the end of 2022, highlighting that Chinese leaders pay close attention to the yuan-dollar exchange rate as an indicator of relative economic and political strength.

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Can PBOC measures prevent yuan testing 7 per dollar?

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