PBOC Cuts Yuan Intervention as Slower Economy Curbs Inflows

FDI (foreign direct investment) has been the force causing the yuan to appreciate as it’s been an avenue for speculative flows as well as real investment.

The real investment flows may have slowed a while back, with speculative flows responsible for the most recent rise in the currency.

As these flows slow, China intervenes less as that force driving the currency appreciation slows.

That leaves them with forces that work to weaken a currency- inflation and its associated rising costs of production.

In the case of China, this has the potential of turning the currency from strong to weak, as discussed here over the last two years.

The declining FDI and reduced intervention indicate progress in that direction.

PBOC Cuts Yuan Intervention as Slower Economy Curbs Inflows: China Credit

July 12 (Bloomberg) — China’s central bank bought the fewest dollars in four months to stem gains in the yuan in June as slowing growth in Asia’s biggest economy damped capital inflows and reduced pressure for the currency to appreciate.

The People’s Bank of China’s purchases of foreign exchange from the nation’s lenders totaled 277.3 billion yuan ($42.8 billion), 26 percent less than in May, according to data released yesterday. Foreign reserves rose $152.8 billion in the second quarter, the least in a year, and government data today showed gross domestic product increased at the slowest pace since 2009.

Expansion is cooling after policy makers raised interest rates three times this year and lenders’ reserve-requirement ratios on six occasions, seeking to tame the fastest inflation since 2008. Forward contracts show investors are the least bullish on yuan gains since a dollar peg ended in June 2010, even after the currency trailed advances in both Brazil’s real and the Russian ruble this year. The average yield on yuan bonds in Hong Kong jumped 62 basis points, or 0.62 percentage point, since May, based on an HSBC Holdings Plc index.

“Rising hard-landing risks are dimming the allure of yuan- denominated assets, resulting in fewer hot money inflows,” said Liu Dongliang, a senior analyst in Shenzhen at China Merchants Bank Co., the nation’s sixth-largest lender. “Inflows may decline further in the second half, lessening the need for the central bank to raise reserve ratios. The PBOC is likely to raise ratios no more than once before the end of 2011.”