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China Adds Market Support With More Cash, Strong Yuan Fix

Tian Chen and Livia Yap

(Bloomberg) -- China’s central bank helped steady the country’s markets Tuesday, a day after a post-holiday plunge for equities and the currency amid the coronavirus’ continued spread.

The People’s Bank of China pumped 400 billion yuan ($57 billion) into the banking system with reverse repurchase agreements on Tuesday, marking the largest single-day addition since January 2019. It also set the yuan’s reference rate stronger than the currency’s official close on Monday and the key 7 level.

On Tuesday, the currency strengthened 0.42% to 6.9928 per dollar as of 5 p.m. in Shanghai. Stocks rebounded, led by a 4.8% jump in the small-cap ChiNext index, while the yield on the most actively traded contract of 10-year government bonds rose four basis points. That’s the most since Oct. 28.

“China sent very strong message that they will do whatever to stabilize its markets and economy,” said Stephen Chiu, an Asia FX and rates strategist at Bloomberg Intelligence. He added it’s probably in authorities’ interests to support the yuan now more than during the trade war last August, as China will need to import and consume more goods such as medical supplies in the near future.

China’s financial markets took a beating Monday across almost every asset class following a week-plus holiday break, as investors weighed the coronavirus’ impact. The onshore yuan weakened below 7 per dollar Monday despite the central bank setting its daily fixing at a stronger-than-expected level. All but 162 of the almost 4,000 stocks in Shanghai and Shenzhen recorded losses.

Virus Jolts China Economy, Forcing Rethink on Almost Everything

The PBOC took its first concrete steps to cushion the economy and plunging markets Monday, providing short-term funding to banks and cutting the interest rate it charges for the money. It added a net 150 billion yuan of funds on Monday using 7-day and 14-day reverse repurchase agreements, cutting both rates by 10 basis points. The cash injection was part of a raft of supportive measures announced over the weekend to soften a market sell-off and help firms affected by the disease outbreak.

PBOC adviser Ma Jun indicated he expects further rate cuts later in the month.

The central bank’s measures so far “are just the beginning of monetary and credit easing,” Nomura Holdings Inc. analysts wrote in a note, predicting the central bank will probably pump in medium-term cash and cut lenders’ reserve requirement ratio to bolster growth.

Traders continue to watch closely for whether the central bank will set the daily reference rate at or weaker than 7 for the first time since Dec. 25.

Following the spot rate with a fixing weaker than 7 on Tuesday would have signaled authorities’ concern over the wider economic impact of the coronavirus, according to Nathan Chow, an economist at DBS Bank Ltd. in Hong Kong. But not doing so demonstrated an effort by the PBOC to stabilize sentiment, he said. The fixing limits the onshore yuan’s daily moves to 2% in either direction.

“It’s not just the virus -- the economy had already been slowing down since last year,” Chow said. “There was a rebound in December but it proved to be short-lived.” It may take a few days for fixing to break 7 but it could happen within this week, he added.

The currency held stronger than 7 from late December through January as trade tensions eased and China’s economy looked to be on steadier footing. The phase-one trade deal between the U.S. and China included a currency pact to avoid manipulation to gain an advantage.

Market watchers had recently revised yuan forecasts amid rising confidence that China had arrested an economic slowdown. Now, some economists are predicting the impact of the virus on China’s economy may be severe, and potentially larger than that of 2003’s SARS outbreak.

To contact the reporters on this story: Tian Chen in Hong Kong at tchen259@bloomberg.net;Livia Yap in Shanghai at lyap14@bloomberg.net

To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, Kevin Kingsbury, David Watkins

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