(Bloomberg). China has set a record for Friday’s weaker-than-forecast Yuan fixing, as it seeks curb currency gains which could threaten its economic recovery.

The reference rate for the currency was 6.3692 USD by the central bank, which is slightly lower than the $6.3688 estimate from traders and analysts in Bloomberg. That’s the most extended series of lower-than-expected yuan fixings since the surveys began in 2018, based on instances when the rate is even a fraction below the estimate.

China’s cabinet this week vowed to keep the yuan basically stable as part of policy support for imports and exports, Xinhua News Agency reported Thursday.

The yuan has outperformed all its emerging-market peers this year, strengthening 2.5% against the dollar, amid robust export growth and inflows of funds into the nation’s bond market. The currency has also been aided by pro-growth policy signals, with the Communist Party’s annual Central Economic Work Conference this month pledging to ensure stability and keep monetary settings flexible next year.

The authorities have stepped up their efforts to slow the yuan’s advance this month. The People’s Bank of China on Dec. 9 asked lenders to hold more foreign currencies in reserve, and on the same day it set its reference rate at the weakest level relative to market expectations since Bloomberg began its surveys in 2018. The fixing limits the onshore yuan’s moves by 2% on either side.

“The PBOC will continue to guide the yuan’s rate lower to prevent it from breaching 6.35 per dollar,” said Ken Cheung, chief Asian foreign-exchange strategist at Mizuho Bank Ltd. in Hong Kong. To achieve this, the authorities might rely on fixing the currency in the immediate future to do so.

Numerous Tools

If the weaker fixes prove to be insufficient, the PBOC can use many of its other tools. The central bank might encourage banks to use the counter-cyclical factor again in fixing formulas. This would lead to lower reference rates. Nomura International suggested that Beijing adopt the measure of selling the Yuan as a way to direct intervention by policy makers. 

At the same time, there’s at least some prospect that the yuan’s strength may start to wane next year. While the Federal Reserve indicated that it will raise interest rates by 2022, its Chinese counterpart expects to maintain liquidity to support growth. That divergence should see the yuan’s interest-rate premium over the dollar shrink, and undermine the attractiveness of Chinese assets.

The PBOC will likely increase its efforts to reduce the yuan’s appreciation if it continues to feel under increasing pressure, according to Chi Lo, senior Asia-Pacific strategist at BNP paribas Asset Management in Hong Kong. Still, the currency’s strength may fade as the world economy recovers and quickening inflation erodes the real-yield spread between China and developed markets, he said.

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