The yuan has been under pressure, hovering near 16-month lows, due to a strong dollar, declining Chinese bond yields, and the potential for increased trade barriers with Donald Trump assuming the U.S. presidency next week, prompting the central bank to take action.
Since late last year, the People's Bank of China (PBOC) has employed various strategies to stabilize the yuan, including issuing warnings against speculative trading and attempting to boost bond yields.
"Today's comments from the PBOC indicate that currency stability remains an important priority for the central bank, despite the market often discussing the possibility of intentional devaluation to offset tariffs," said Lynn Song, chief economist for Greater China at ING.
On Monday, officials reiterated their stance against speculation targeting the yuan. The PBOC has raised the borrowing limits for companies operating offshore, aiming to facilitate greater foreign exchange inflow.
PBOC Governor Pan Gongsheng addressed the Asia Financial Forum in Hong Kong, indicating that the central bank plans to significantly increase the share of China's foreign exchange reserves held in Hong Kong, although specific details were not disclosed.
As of the end of December, China's foreign reserves were approximately $3.2 trillion, but information regarding the investment of these reserves remains limited.
"Increasing China's foreign reserves will give more ammunition to defend the currency if the market situation eventually necessitates it."
China's onshore yuan was trading at 7.3318 per dollar as of 0450 GMT on Monday, remaining close to a 16-month low of 7.3328 reached on Friday.
Since the U.S. election in early November, the yuan has depreciated by over 3% against the dollar, driven by concerns that Trump's potential new trade tariffs could further strain the already struggling Chinese economy.
Since mid-November, the central bank has been setting its official midpoint guidance above market expectations, which analysts interpret as a sign of concern regarding the yuan's depreciation.
The announcements made on Monday highlight the challenges faced by the People's Bank of China (PBOC) as it attempts to stimulate economic growth by maintaining loose monetary conditions while also managing a surging bond market and stabilizing the currency amidst ongoing political and economic uncertainties.
Recently, the PBOC has introduced additional measures. To prevent yields from declining excessively and to regulate the offshore circulation of the yuan, it has announced a suspension of treasury bond purchases while planning to issue substantial amounts of bills in Hong Kong.
Gary Ng, a senior economist at Natixis, noted that while China's onshore market has a more robust pool of yuan deposits, Hong Kong plays a crucial role due to its higher turnover from foreign exchange swaps and spot transactions.
This suggests Hong Kong's potential to facilitate yuan appreciation through trade and investment.
Monday's data reveal a December surge in Chinese exports, with imports also recovering. However, year-end export growth was partly attributable to preemptive shipments by factories anticipating increased trade friction under the Trump administration.