China Central Bank Stabilises Yuan by Tightening Liquidity

According to a former central banker, increased yuan bill sales by China's central bank in Hong Kong this week helped tighten liquidity in the offshore market, helping to stabilise the yuan by making it more expensive for speculators to short the currency. Sheng Songcheng, a former director of the People's Bank of China's (PBOC) statistics and analysis department, made the remarks, according to the state-owned Shanghai Securities News on August 24.

Sheng made the observation after the PBOC sold 35 billion yuan ($4.81 billion) worth of bills in Hong Kong on Aug 22, exceeding the 25 billion yuan of the bills coming due this month.

The PBOC usually conducted a flat rollover by auctioning the same number of bills as were maturing, because selling more would reduce yuan liquidity in the market.

Higher offshore yuan bill sales in Hong Kong "could be related to recent yuan situations," Sheng was quoted as saying, as they would help stabilise foreign exchange market expectations and are regarded as a policy management tool.

"The yuan exchange rate will not depreciate unilaterally, but will maintain two-way fluctuations," he predicted.

"In the medium to long term, the yuan exchange rate is supported by solid economic fundamentals." In the long run, China's sound economic fundamentals have not changed. The yuan will remain relatively stable as the economy continues to stabilise, according to Sheng.