China Acts to Slow Gains by Strongest Yuan in Almost Three Years

The move came after policymakers sent a string of signals suggesting they are growing uncomfortable with the yuan’s strength. Beijing this week allowed mainland companies to make more loans abroad, and a state-backed newspaper cited analysts as saying the appreciation will slow. On Tuesday, the onshore yuan erased a gain of as much as 0.5% in an abrupt move, as a few big state lenders were seen to be selling the currency.

However, these steps are less aggressive compared with the measures taken late last year to limit the yuan’s gains. Back then, Beijing made it cheaper for traders to bet against the currency, and allowed onshore investors to buy more overseas assets. A yuan that’s too strong could erode the competitiveness of Chinese exporters, hence jeopardizing the country’s economic rebound.

While a slide in the dollar has supported most Asian currencies, the yuan has emerged as one of the best performers. The exchange rate jumped for seven months in a row as of December, the longest run since 2011. It has been bolstered by China’s economic recovery from the virus pandemic and capital inflows chasing the yuan’s wide interest-rate premium versus the rest of the world.

Here are some charts reflecting investor confidence in the Chinese currency:

This week, the onshore yuan traded at the largest premium over the reference rate since November, reflecting strong demand for the currency in the spot market. The fixing limits the yuan’s movements by 2% on either side.

The offshore yuan has been trading at stronger levels than the onshore rate for 26 days in a row, the longest stretch since 2017. The currency traded overseas is usually a better gauge of investor sentiment, as it’s subject to less official influence. So the gap is a reflection of optimism toward the yuan.

Overseas funds increased their holdings of onshore bonds and stocks by more than 30% in the nine months through September, official data showed.

Buying momentum is so strong that there are signs that the rally is overdone. The dollar-yuan’s 14-day relative strength index has reached a level that to some traders may suggest a correction of the Chinese currency is around the corner.