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China’s central bank has stepped up efforts to protect the yuan’s exchange rate amid growing concerns about the health of the world’s second-largest economy.

The People’s Bank of China has struggled to stem the yuan’s depreciation after a slew of dismal economic data this week showed weak exports and falling consumer confidence.

Currency traders and analysts said downward pressure on the yuan has also intensified after the central bank’s surprise rate cut, and state-owned banks have been buying yuan and selling dollars, in an apparent attempt to slow the pace of depreciation.

In the latest move to defend the yuan, the central bank on Friday set the yuan’s daily midpoint rate at 7.2006 per dollar, at which it allows 2 percent for two-way trading. That compares with an average estimate of 7.3047 among analysts polled by Bloomberg.

The gap between expectations and the level set by the PBOC was the widest since the survey began in 2018.

Traders and strategists said that reflected the central bank’s growing unease about the pace of the yuan’s depreciation, which has been fueled by poor economic performance and outflows from yuan-denominated bonds and stocks.

The People’s Bank of China is also under pressure to boost growth, injecting 757 billion yuan of short-term liquidity into the country’s banking system this week – the largest such move since March and threatening to undercut efforts to stem the yuan’s fall .

“Ideally, they would like to cut interest rates without depreciating the yuan, but you can’t do that given the strength of the dollar and how high interest rates are in the U.S.,” said Shan Hui, chief China economist at Goldman Sachs.

The line chart (CNY/USD) of the difference between the daily mid-price and market expectations of the trading range shows a record pullback by the central bank through the trading range mechanism

“The situation is different now – the previous streak of weakness was helped by fundamentals (of the Chinese economy) and dollar interest rates are not as high,” said a foreign exchange trader at a major European bank in Shanghai.

Benchmark U.S. Treasury yields surged to their highest level in 16 years this week, widening the gap between U.S. and Chinese bond yields.

The trader said the market is now pricing in a breakout of the yuan’s low of 7.3274 yuan reached in October last year at the peak of China’s Covid-19 city-wide lockdown.

For months, China’s economy has struggled to bounce back from last year’s end of strict epidemic control, with weak trade and little sign of a recovery in consumer spending. Unlike much of the world, price increases have been muted, with data for July showing the economy slipping into deflation.

Policymakers in Beijing have set a growth target of 5 percent for this year, the lowest level in decades.

CNY/USD line chart shows yuan testing lower bound of trading range

Goldman Sachs’ Wei Shan said the central bank still has a variety of tools at its disposal to offset downward pressure, including adjusting limits on dollar lending and Chinese bank borrowing.

But she added that the People’s Bank of China was unlikely to start draining its reserves to prevent the exchange rate from falling below last year’s lows. “It’s more about the speed of the depreciation, and when the depreciation reaches a certain level, they might get a little nervous.”

Sameer Goel, global head of emerging markets and Asia-Pacific research at Deutsche Bank, said the strategy of using daily fixings in currency bands to protect against depreciation had “diminishing returns”.

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