- China's central bank is caught between trying to support the yuan and the country's economy.
- The People's Bank of China has been ramping up its commentary on the yuan, which is falling against the dollar.
China's central bank is caught in a pickle between trying to prop up the falling yuan while also boosting an economy that's losing momentum.
A key dilemma the People's Bank of China faces is that its main lever for juicing growth — rate cuts — can also put more downward pressure on the yuan, which has fallen by 5% against the dollar this year.
Central bankers appear to be attempting to have it both ways by stepping up verbal intervention on the yuan while its market intervention lowers rates.
On Wednesday, the central bank-backed publication Financial News ran a commentary that said the PBOC has sufficient methods for stabilizing currency markets even if the yuan crashes in a "panic."
Last week, the PBOC mouthpiece said the yuan will be stable through the second half of year and cautioned against currency speculation.
"Do not bet on the appreciation or depreciation of the renminbi. If you gamble for a long time, you will lose," it warned.
Similarly, the bank said in May that the yuan has a "solid foundation" with an exchange rate the "can have a basic stability at a reasonable and balanced level."
The ramp-up in commentary comes as the central bank's other method of influencing the yuan has fizzled. The PBOC sets a daily reference point, from which the yuan can move within a certain range. After several attempts in recent days to boost the yuan with aggressive reference points, the currency has given up its gains.
Meanwhile, the PBOC's rhetoric contrasts with its actions on rates. Last month saw the PBOC cut various short- and medium-term rates in a series of moves to to stimulate the China's stalling economy.
After China lifted its pandemic-era restrictions, observers had high hopes for a robust rebound to take hold. Though the first quarter saw growth spike to 4.5%, more recent data have pointed to sharp slowdowns in industrial production, retail sales, and investment.
But the PBOC's cuts have widened the gap with US rates as the Federal Reserve continues to tighten with more hikes on the way, making dollar assets more attractive to investors.
And while officials in Beijing is reportedly planning some stimulus measures, they are seen as less ambitious and less effective compared to prior downturns.
Instead, the government will likely provide modest support for the economy with a muted boost to infrastructure spending, UBS Investment Research economist Tao Wang wrote in The Financial Times last month.
"Most importantly, I think Beijing's policymakers understand these economic woes are not just cyclical. Large stimuli cannot address deep-rooted structural issues," she said. "Willingly or not, China is transitioning away from growth led by property and local government, which is a painful process."