China announced more tools to support its weak currency on Monday, unveiling plans to park more dollars in Hong Kong to bolster the yuan and to improve capital flows by allowing companies to borrow more overseas.
A dominant dollar, sliding Chinese bond yields and the threat of higher trade barriers when Donald Trump begins his US presidency next week have left the yuan wallowing around 16-month lows, spurring the central bank into action.
The People's Bank of China (PBOC) has tried other means to arrest the sliding yuan since late last year, including warnings against speculative moves and efforts to shore up yields.
On Monday, authorities warned again against speculating against the yuan. The PBOC raised the limits for offshore borrowings by companies, ostensibly to allow more foreign exchange to flow in.
PBOC Governor Pan Gongsheng meanwhile told the Asia Financial Forum in Hong Kong that the central bank will substantially increase the proportion of China's foreign exchange reserves in Hong Kong, without providing details.
China's foreign reserves stood at around $3.2 trillion at the end of December. Not much is known about where the reserves are invested.
"Today's comments from the PBOC indicate that currency stability remains an important priority for the central bank, despite the market often discussing the possibility of intentional devaluation to offset tariffs," said Lynn Song, chief economist for Greater China at ING.
"Increasing China's foreign reserves will give more ammunition to defend the currency if the market situation eventually necessitates it."
China's onshore yuan traded at 7.3318 per dollar as of 0450 GMT on Monday, not far from a 16-month low of 7.3328 hit on Friday.
It has lost more than 3% to the dollar since the US election in early November, on worries that Trump's threats of fresh trade tariffs will heap more pressure on the struggling Chinese economy.
The central bank has been setting its official midpoint guidance on the firmer side of market projections since mid-November, which analysts say is a sign of unease over the yuan's decline.
Monday's announcements underscore the PBOC's challenges and its juggling act as it seeks to revive economic growth by keeping cash conditions easy, while also trying to douse a runaway bond rally and simultaneously stabilize the currency amid political and economic uncertainty.
It has in recent days unveiled other measures. In efforts to prevent yields from falling too much and to control circulation of yuan offshore, it said it is suspending treasury bond purchases but plans to issue huge amounts of bills in Hong Kong.
Gary Ng, senior economist at Natixis, said while China's onshore market has a much better pool of yuan deposits, Hong Kong plays a "significant role with higher turnover driven by FX swaps and spot transactions."
"This means that Hong Kong can be a venue for supporting the yuan through trading activities and potential investments."
Data on Monday showed China's exports gained momentum in December, with imports also showing recovery, although the export spike at the year-end was in part fueled by factories rushing inventory overseas as they braced for increased trade risks under a Trump presidency.
