SHANGHAI (Reuters – The country’s currency is climbing rapidly against its trading partners. Investors are concerned by the lack of any concern or intervention from authorities.

Beijing has yet to intervene verbally or in direct during the ascent of the Yuan from early September. It reached 4-month highs this week and is now at 6.4 USD. State Administration of Foreign Exchange, which is the chief currency regulator, said Wednesday that the authorities will maintain stability for the yuan.

That silence, amid growing signs of weakness https://www.reuters.com/world/china/chinas-self-inflicted-slowdown-tests-beijings-reform-resolve-2021-10-19 in the economy, has analysts guessing that the People’s Bank of China (PBOC) is keeping to its word about letting market forces dictate the yuan’s trajectory.

Another theory suggests that the currency is being left alone, while authorities work to reshape the financing rules for technology, property and other areas. Another alternative is that the PBOC waits for the Federal Reserve’s tightening policy to take effect, which would reduce foreign money flowing up the yuan.

Market participants need clarity and hope that Wednesday’s 100-mark mark for the 24-currency trade weighted yuan index, which was last reached in the late 2015 launch, is now crossed.

Analysts at Maybank stated that “keeping dollar-yuan steady could be the sweet spot” at this stage. However, they noted that for now, a weaker yuan will help to rein in rising costs of precious raw materials for importers on the mainland.

Reuters reached out to SAFE and the PBOC for clarification but they did not respond immediately.

The third quarter saw a significant deceleration of the second-largest economy worldwide, due to power shortages and crackdowns on the property and COVID-19 sectors. However, the central bank kept rates stable and tightened cash supply.

Tommy Xie from OCBC Bank, head of Greater China Research, points out Sun Guofeng, PBOC monetary policies head,’s recent statements about maintaining monetary conditions balanced, as a sign for what’s next.

My feeling is that central banks are now confident and relaxed. Xie stated that there is little risk of capital outflow and liquidity can be controlled easily.

He added that the currency would be stable due to the rising trade surplus, increased capital inflows, and an oversupply of dollars in banks.

TOLERANCE HAS LIMITS

The central bank manages the currency tightly, despite China’s currency swings over the last four years.

Authorities have given warnings to currency traders about placing one-way bets. They also modified their reserve requirements and used their daily benchmarks. State-run banks were allowed into swap markets for a rapid appreciation of the yuan.

Trade-weighted indices have largely stayed in a 92 to 98 range since 2016. FX reserves hover around $3 trillion.

CFETS is currently up 5.75% this year. This was mainly due to the yuan’s gains versus the Japanese yen. Euro and South Korean won capital inflows into Chinese securities and stocks as well as exporter earnings.

The yuan, by contrast, has risen 2.2% in comparison to the dollar.

Ken Cheung from Mizuho Bank Hong Kong, chief Asian FX strategist said that “a breach of 100 CFETS index will pressure China’s exports.”

He noted that shipments remain exceptionally strong.

This explains how the central bank is able to tolerate weak yuan. He said that a weaker Yuan during a period when Washington and Beijing are reviewing Phase 1 could also be sensitive.”

Another reason the PBOC might be resigned the yuan’s actions is due to the glut of dollars within the banking system. It has accumulated in recent years because state banks and corporations have placed surplus dollar earnings and inflows into deposits.

While the PBOC has remained on the sidelines while the dollar deposit pile has grown, it is now just slightly below the $1 trillion peak reached in June.

Latest evidence for this overhang was the SAFE balance of payments report, which showed that China had made “other” outbound investments of $265.3 billion during the first six months. The bulk of these were deposits or loans.

Tao Chuan is chief macro analyst of Soochow Securities. “We think that dollar liquidity held onshore may be a major reason for the yuan’s detachment form its fundamentals,” he said.

“The central bank stopped making frequent FX interventions…a dearth of investment channels abroad and restrictive measures faced by domestic financial institution has caused a lot of FX to accumulate on the accounts of commercial banks.”