PBOC adopts hands-off approach on steep devaluation of yuan

No imminent need to take action: economist

Despite a steep downward trend in the yuan's exchange rate against the U.S. dollar in recent days, Chinese monetary policymakers have largely remained silent and appear to be taking a hands-off approach, analysts noted Thursday.

This approach might not help to ease the downward pressure, but it makes more sense for the People's Bank of China (PBOC), the central bank, to refrain from making large-scale interventions at least for now, unless it becomes "absolutely necessary," analysts said.

In recent months, the yuan has continued to depreciate against the U.S. dollar, but this trend took a steep turn this week, as the dollar made a strong upward move following the U.S. election results. On Wednesday, the yuan dropped to the lowest level in over eight years, after the PBOC set the daily trading midpoint at 6.8592 per dollar.

On Thursday, despite the fact that the PBOC has set a weaker midpoint for the 10th consecutive day, the yuan firmed against the dollar in trading, but still hovered around low levels, having opened at 6.876 per dollar and exchanging at 6.8692 at midday.

Hands-off approach

Aside from setting the midpoint, where the yuan is allowed to fluctuate within 2 percent below or above, the PBOC has maintained silence and avoided intervention measures.

The PBOC hasn't made any public statement on the yuan's recent devaluation and there has been no indication of the central bank taking large-scale measures to curb the yuan from falling.

There are many merits in the PBOC's hands-off approach, given the current volatility in foreign exchange market, Liu Xuezhi, a senior analyst at Bank of Communications, told the Global Times on Thursday.

Liu said there are two reasons that might be behind the PBOC's decision: one is the cost of a potential intervention and its effectiveness, while the other is the PBOC's long-term vision to let the market play a decisive role in the exchange rate.

"With the U.S. dollar continuing to strengthen, taking measures such as cutting the foreign reserve to support the yuan is like battling the whole world at once: the loss outweighs the gain," Liu said, noting for now such measures could be costly and ineffective.

China's foreign reserves have been on the decline in recent months, sparking rumors that the PBOC is cutting it to support the yuan, but Liu said the move is "more of a natural market move" given the decline in U.S. bonds.

No shortage of tools

Other analysts also felt the PBOC's best approach was to wait and see before making any decisions, as there are so many uncertainties around the world.

"There are so many uncertainties in the market right now, especially with Donald Trump elected president - whether he will follow through on his economic and trade proposals, and the growing expectation for a U.S. interest rates hike," Li Daxiao, chief economist at Shenzhen-based Yingda Securities, told the Global Times.

"The depreciation pressure is still controllable and there is no imminent need to take action," Xu Gao, chief economist at China Everbright Securities Co, said, adding that "there is no shortage of tools for the PBOC to pick to stabilize the yuan when it's necessary."

But the hands-off approach could mean the pressure on the yuan's exchange rate against the dollar is likely to persist in the near future and could have some collateral damage on the Chinese economy, analysts also pointed out.