(Bloomberg) -- China net injected the most cash in a year and set its daily yuan fixing stronger than the key 7 per dollar level, as it seeks to support its plunging financial markets.
The People’s Bank of China net injected 400 billion yuan ($57 billion) into the banking system with reverse repurchase agreements on Tuesday, marking the largest single-day addition since January 2019. It set the yuan’s reference rate at 6.9779 per dollar, stronger than the currency’s official close on Monday. Traders are watching closely this week to see if the central bank will set the daily reference rate at or weaker than 7 for the first time since Dec. 25.
The measures so far “are just the beginning of monetary and credit easing,” Nomura Holdings Inc. analysts wrote in a note, adding that the central bank will probably pump in medium-term cash and cut lenders’ reserve requirement ratio to bolster growth.
Following the spot rate with a fixing weaker than 7 would have signaled authorities’ concern over the wider economic impact of the coronavirus, according to Nathan Chow, an economist at DBS Bank Ltd. in Hong Kong. But holding a line stronger than 7 demonstrates an effort to stabilize sentiment, he said. The fixing limits the onshore yuan’s moves to 2% in either direction.
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“It’s not just the virus -- the economy had already been slowing down since last year,” Chow said. “There was a rebound in December but it proved to be short-lived.” It may take a few days for fixing to break 7 but it could happen within this week, he added.
The yuan’s drop Monday came despite the central bank setting its daily fixing at a stronger-than-expected level. China’s financial markets took a beating across almost every asset class as investors weighed the impact of the deadly disease that has killed at least 425 and infected 20,000.
The currency held stronger than 7 from late December through January as trade tensions eased and China’s economy looked to be on steadier footing. The phase-one trade deal between the U.S. and China included a currency pact to avoid manipulation to gain an advantage.
Market watchers had recently revised yuan forecasts amid rising confidence that China had arrested an economic slowdown. Now, some economists are predicting the impact of the virus on China’s economy may be severe, and potentially larger than that of 2003’s SARS outbreak.
The daily fixing is calculated with formulas that take into account factors such as the previous trading day’s official close at 4:30 p.m, the yuan’s move against a basket of currencies and the moves in other major exchange rates.
To contact Bloomberg News staff for this story: Livia Yap in Shanghai at lyap14@bloomberg.net;Tian Chen in Hong Kong at tchen259@bloomberg.net
To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, David Watkins, Kevin Kingsbury
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