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08

2022

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09

China Is Taking More Visible Measures to Slow Currency's Descent

Source:

Bloomberg; OIG+X

Recently, the news that the Fed raised its benchmark interest rate brought up heated discussions in China's domestic market. Offshore RMB fell below 6.99 yuan against USD, which means the era of 7 yuan may approach soon. The purchasing power of RMB also declines with the depreciation. For the imported meat market, the price advantage of overseas meat products seems weakened. However, it can be found that the depreciation of RMB has a faint impact compared to the frail domestic consumer market.

 

China set a stronger-than-expected exchange-rate fixing for a 10th straight day and said it will allow banks to hold less foreign currencies in reserve, its most substantial moves yet to stabilize a weakening yuan.

 

The People's Bank of China set the yuan's reference rate at 6.9096 per dollar on Tuesday, trailing behind the currency's move to a two-year low. That came a day after the central bank said financial institutions will need to hold just 6% of their foreign exchange in reserve from Sept. 15, effectively increasing the supply of dollars and other currencies onshore. The decrease of 2 percentage points is the biggest in data going back to 2004.

 

OIG+X Analysis:

 

Recently, the news that the Fed raised its benchmark interest rate brought up heated discussions in China's domestic market. Offshore RMB fell below 6.99 yuan against USD, which means the era of 7 yuan may approach soon. The purchasing power of RMB also declines with the depreciation. For the imported meat market, the price advantage of overseas meat products seems weakened. However, it can be found that the depreciation of RMB has a faint impact compared to the frail domestic consumer market.

 

August should have been the replenishment period for Chinese buyers preparing for the peak consumption in Q4. However, Chinese purchasers now are taking a more cautious attitude according to the monitoring of the market trend. Several traders have feedback that the market becomes calmer recently with flat transactions. It's believed that the main reason belongs to the constant Covid-19 epidemic and strict control measures in local regions, which leads to the fatigued demand in the end-consumption market and not ideal cargo circulations. This uncertainty, coupled with the currency's continued depreciation, has left holders worried about bearing more financial pressure. More traders participated in the price inquiry last week, while the trading volume was still not optimistic. Three South American countries all decreased their offers in the beef futures market, of which Brazil's quotations fell the most because of the sales pressure. The market still faces downward pressure with the mounting cargo previously purchased arriving at ports, uncertainties in the domestic end-consumption market, and undersell behaviors in the spot market.