The yuan rallied past the 7 per dollar milestone for the first time in 16 months as investors digested a raft of measures to support the Chinese economy and the recent Federal Reserve rate cut kept the dollar on the back-foot.
The offshore yuan rose as high as 6.9951 per dollar on Sept 25, after China unleashed a blitz of policy support measures amid concerns over its growth target.
The Peoples Bank of China (PBOC) on Sept 24 announced plans to lower borrowing costs and inject more funds into the economy, as well as to ease households’ mortgage repayment burden.
Governor Pan Gongsheng said the central bank will in the near future cut the amount of cash that banks must hold as reserves, freeing up about 1 trillion yuan for new lending.
The PBOC will also cut the seven-day reverse repo rate, its new benchmark, by 0.2 percentage points to 1.5 per cent, as well as other interest rates.
The property market support package included a 50 bps reduction on average interest rates for existing mortgages, and a cut in the minimum downpayment requirement to 15 per cent on all types of homes, among other measures.
The currency had already been rallying this quarter as expectations that the Fed will further loosen its policy after delivering a half percentage point rate cut kept the dollar near the lowest level since January.
Yuan gains could extend if greenback weakness drives Chinese exporters to repatriate some of their large dollar holdings into the local currency. Capital flows into the country have already improved in August, as local firms registered net sales of foreign exchange at banks for the first time in 14 months. BLOOMBERG
