China is reversing course and loosening some financial restrictions after the yuan's appreciation in 2017.
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China just reversed 2 policies designed to keep the yuan from sliding
The People's Bank of China is loosening some restrictions that were added to soften depreciation pressures on the yuan.
The People's Bank of China will remove an October 2015 measure that made it more expensive for onshore banks to use currency forwards as well as a January 2016 reserve requirement on foreign banks' yuan deposits, according to the Wall Street Journal's Lingling Wei.
The yuan weakened against the US dollar by about 0.6% on Monday after the news crossed the wires.
Both measures were originally introduced to soften depreciation pressures on the yuan. They followed the PBoC's August 2015 devaluation of the yuan, which spooked investors. At the time, there were concerns that the currency might continue to dip further.
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This year, however, the onshore yuan has appreciated by over 6% against the dollar as the US currency has continued on its downward trajectory. The dollar index has fallen by about 11% against a basket of currencies since US President Donald Trump's inauguration.
But in recent weeks, the yuan has appreciated by more than the dollar's corresponding weakening, Tao Wang, economist at UBS, pointed out in a note to clients last week.
Some analysts have suggested that the central bank's decision to remove the earlier measures reflects worries that the strengthening yuan could hurt exports. (
But not everyone is convinced that a stronger yuan is the central bank's biggest concern. Mark Williams, chief Asia economist at Capital Economics, argued that the yuan's recent gains against the dollar have been mostly offset by losses against other currencies, and that this is why policymakers made their move.
He illustrated that argument via a chart, which shows that the yuan has appreciated against a broad trade-weighted basket of currencies by far less than it has appreciated against the US dollar.
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"We don't believe that officials at the People's Bank are so acutely sensitive to the level of the exchange rate that they are now worried about renminbi strength — it has barely moved in trade-weighted terms," said he said in a note to clients.
"But now that depreciation pressure has abated, policymakers will want to introduce more uncertainty about the outlook to prevent the re-emergence of a view that the currency will only move one way."
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