China Guides Yuan Higher against Dollar amid Risk of Market Meltdown

China’s officials have been guiding the yuan higher against the dollar amid anxiety over Beijing’s deleveraging campaign.

The move has taken market watchers by surprise. The reference rate used by the People’s Bank of China to manage the yuan has come in stronger than the forecasts of four banks who regularly track the measure on 25 of the past 32 trading days.

“The PBOC is using the stronger fixings to prevent panic sentiment from spreading to the currency market,” said Xia Le, chief economist at Banco Bilbao Vizcaya Argentaria SA in Hong Kong, referring to the reference rate that’s updated each day.

“In the short term, no one can fight against the PBOC when it intervenes through the fixings. Investors will likely become more willing to sell the dollar, pushing the yuan higher from current levels.”

Nevertheless, China appears to be struggling to find a balance between financial risks and avoiding larger selloff. Decision makers are stepping up controls on the banking industry, but also boosting injections of cheap cash amid concern over tight liquidity.

Chinese currency is playing a steadying role, too, with foreign investors citing the currency’s stability in the face of spiking bond yields and equity-market whiplash as one of the reasons they’re sanguine about the clampdown.

Read more at Bloomberg.