SHANGHAI/HONG KONG – China announced plans to strengthen its currency on Monday, aiming to boost the yuan and improve capital flows by allowing companies to borrow more abroad. The move comes as the yuan has slid to 16-month lows, fueled by a strong dollar, sliding Chinese bond yields and the threat of higher trade barriers under President-elect Donald Trump.
The People’s Bank of China (PBOC) has tried various measures to arrest the yuan’s decline, including warning against speculative moves and shoring up yields. The central bank increased the limits for offshore borrowings by companies, allowing more foreign exchange to flow in. Additionally, PBOC Governor Pan Gongsheng announced that the central bank will substantially increase the proportion of China’s foreign exchange reserves in Hong Kong.
China’s foreign reserves stood at around $3.2 trillion at the end of December. The central bank has been setting its official midpoint guidance on the firmer side of market projections since mid-November, indicating unease over the yuan’s decline.
China’s yuan traded at 7.3318 per dollar on Monday, close to a 16-month low of 7.3328 hit on Friday. It has lost more than 3% to the dollar since the U.S. election in early November.
“Today’s comments from the PBOC indicate that currency stability remains an important priority for the central bank,” said Lynn Song, chief economist for Greater China at ING. “Increasing China’s foreign reserves will give more ammunition to defend the currency if the market situation eventually necessitates it.”
China’s exports gained momentum in December, with imports also showing recovery, but the export spike was driven by factories rushing inventory overseas in anticipation of increased trade risks under a Trump presidency.