China's yuan continues to fall against the dollar despite Beijing's aggressive steps to prop up the currency
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- China's yuan is nearing a key psychological milestone of seven per dollar even as Beijing imposes a strict reference rate for the currency.
- The yuan extended losses against the greenback Wednesday, facing headwinds like a hawkish US Fed as well and domestic COVID-19 lockdowns.
- China's central bank set the currency's reference rate firmer than expected to stem the fall.
China's yuan continues to weaken against the dollar and is getting closer to the psychological threshold of 7 per greenback, even as Beijing has set a steep reference rate for the currency.
The People's Bank of China moved the fix 454 pips above the average estimate, according to a Bloomberg survey. It marks the 11th consecutive day of stronger-than-expected fixings.
The currency continues to weaken thanks to a hawkish US Federal Reserve, as well as China's ongoing COVID-19 lockdowns, which have weighed on industry and the economy. Bloomberg data shows that the spread between the onshore yuan and the currency fixing widened to more than 600 pips, which signals bearish sentiment and marked the biggest spread since May.
On Monday, too, China's central bank announced it would slash foreign-currency reserve ratio requirements, another move aimed at propping up the yuan.
Starting on September 15, financial institutions will need to hold 6% of their foreign-currency deposits in reserves, down from the current 8%.
Meanwhile, China's foreign exchange reserves declined for a second consecutive month and hit their lowest point since October 2018, the government said this week.
China's shrinking stockpile stemmed in part from the steep strengthening of the US dollar, which could see even more gains as markets begin to weigh the odds of another 75-basis-point rate hike in the US.
"We will keep at it until we are confident the job is done," Jerome Powell said at Jackson Hole in August, underscoring the bank's commitment to raising interest rates and lowering inflation.
High global inflation also weighed on China's economic prospects, as the country's trade surplus, which is a key source of foreign exchange, dropped to $79.4 billion in August, down $21.9 billion from July, according to Bloomberg data.
That smaller surplus will drag on the yuan further, even with policy moves from the People's Bank of China.