The yuan has lost 5% against dollar in 3 weeks

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The yuan has lost 5% against dollar in 3 weeks

The yuan's 5% decline against the dollar in the last three weeks has raised speculation about when and how the People's Bank of China PBOC might act to slow its depreciation.

The yuan has lost 3.6% against a basket of major trading partners' currencies.

The main factors behind portfolio outflows from China are rising U.S. interest rates, the war in Ukraine and a slowing domestic economy due to lockdowns in Chinese cities battling outbreaks of COVID - 19.

While most market participants expect the central bank to slow the pace of its decline, they expect the yuan's weakness to persist for the time being.

Robin Xing, chief China economist at Morgan Stanley, said PBOC could prevent one-way speculation with macroprudential tools, verbal guidance and unwinding of ample FX deposits over the past two years.

The PBOC may be uncomfortable with the yuan's recent decline in late April, when it reduced the amount of foreign exchange that banks must hold in reserve.

Following are some policy moves and measures used by the PBOC to curb excess yuan volatility over the past few years:

The counter-cyclical factor was added to the formula to fix the daily midpoint for the yuan-dollar exchange rate back in 2017 by the PBOC.

The central bank has never disclosed how it calculated the counter-cyclical factor, but regulators said it was a way to better reflect fundamental supply and demand and lessen the effects of herd mentality on the currency market.

It was suspended in late 2020 when the yuan strengthened as a result of higher foreign capital inflows and improving economic fundamentals.

The onshore spot is yuan, which can trade in a 2% range around the midpoint set by the PBOC in the daily fix.

Currency traders are concerned with any significant discrepancy between market projections of what the fix might be, and where the PBOC will set the midpoint as an indication of how the central bank wants to tug the market.

Senior officials from the central bank and FX regulators have been using public speeches and commentaries in state-owned media to send messages to the currency market, usually reiterating a pledge to keep the yuan stable.

In 2018, Pan Gongsheng, a vice governor at the PBOC, warned speculators against shorting the yuan, reminding them of the country's healthy economic fundamentals and ample foreign exchange reserves.

In 2018, the PBOC raised their foreign exchange risk reserve ratio to 20% from zero, making it more expensive for financial institutions to short the yuan in derivatives markets.

It was reduced to zero in late 2020.

To reduce yuan debt offshore, the PBOC issued yuan-denominated bills in Hong Kong.

Analysts said the move sent a clear message about expectations for the yuan exchange rate, even though the amounts were small.

During previous phases of yuan weakness, China's major state-owned banks have been seen selling dollars and it was assumed that they were probably acting at the behest of the PBOC, bankers told Reuters.

State banks were also seen swapping yuan for dollars in forwards and immediately selling them into the spot market to prop up the Chinese currency during 2018 to 2019.