"While the authorities are attempting to guide a stronger Yuan fix, market forces continue to dictate," Janet Mui, head of market analysis at RBC Brewin Dolphin, said. "It appears that the PBOC is fine with a gradual Yuan depreciation." They will fight with large and sharp moves."

China Orders State Banks To Prop Up Yuan

 Chinese officials urged state-owned banks this week to increase currency market involvement in order to prevent a surge in Yuan volatility. According to the persons, senior officials are also considering using methods such as lowering banks' foreign-exchange reserve requirements to prevent the currency from rapidly depreciating. The request came when the Yuan sank to 7.35 per dollar, a level that top leadership has been watching closely, they said.

Despite a surprise interest-rate decrease, a streak of stronger-than-expected daily reference rates for the Yuan, and significant injections of short-term cash into the financial system, a sense of dread has crept on China's markets this week. Despite these steps, the onshore Yuan is falling to its lowest level since 2007, and a key Hong Kong stock index is approaching a bear market.

China Steps Up Its War Against Yuan Bears By Improving Guidance

The People's Bank of China stated in its monetary policy report that China will steadfastly avoid excessive Yuan adjustment. According to the report, the foreign-exchange market is currently in line with fundamentals.

Chinese officials have the necessary instruments, knowledge, and confidence to ensure the "orderly functioning of the foreign-exchange market," according to the central bank.

The PBOC did not respond promptly to a fax seeking comment on the Yuan intervention.

"While the authorities are attempting to guide a stronger Yuan fix, market forces continue to dictate," Janet Mui, head of market analysis at RBC Brewin Dolphin, said. "It appears that the PBOC is fine with a gradual Yuan depreciation." They will fight with large and sharp moves."

Advances in Yuan

The offshore Yuan extended its climb, trading up to 0.5% higher at 7.30 per dollar, while the onshore Yuan rose 0.4%.

The so-called fixing, which limits the onshore Yuan’s daily swings by 2% on either side and is the PBOC's preferred instrument for foreign-exchange management, is losing traction as traders lose patience with China's consistently disappointing economic statistics. As another step to stabilize the Yuan, the central bank had to announce an additional bill sale in Hong Kong this week, essentially limiting offshore liquidity.

If the PBOC wants to intensify its war against Yuan bears, it can dig deeper into its toolbox. It can choose to cut the amount of foreign currency deposits banks are obliged to hold as reserves, thus pumping dollars into the system, or to make derivatives bets against the Yuan more expensive.

The Yuan "should be weak enough to support the export industry, but not dramatically weakening as this would increase pressure on capital that wants to leave the country," said Ulrich Leuchtmann, Commerzbank AG's director of currency strategy