“The continued devaluation of the yuan is definitely not conducive to the currency becoming internationalised. This is not our policy preference.”

That’s from Chinese Premier Li Keqiang who spoke on Wednesday at the World Economic Forum in the northeastern port city of Dalian. Li also announced that China is set to allow foreign central banks access to the onshore interbank FX market, a move designed to buoy the country’s bid for SDR inclusion and hasten the currency’s internationalization.

Here’s what Irene Cheung, a currency strategist at Australia & New Zealand Banking Group in Singapore had to say about the above (via Bloomberg): 

“This is a step toward internationalization of the yuan [but] the gap between onshore and offshore yuan will narrow only when China’s economic fundamentals get better.”

Or when the PBoC gets fed up and decides to intervene.  Read on. 

As the $94 billion FX reserve burn in August made clear, the yuan has come under continuous pressure in the wake of the PBoC’s switch to a new currency regime on August 11, reflecting the market’s expectation of a continually weaker currency. That pressure has manifested itself in the spread between the onshore and offshore spot which Beijing is keen on narrowing as part of the broader effort to rein in speculation that the yuan will continue to drop.

Late last month, in a kind of roundabout effort to narrow the spread, China slapped a 20% reserve requirement on FX forwards. That move, analysts said, was unlikely to do the trick. “The spread on CNY and CNH may not substantially narrow on this move alone, as global demand on dollar remains high and China economic growth remains slow,” Andy Ji, a Singapore-based currency strategist at CBA told Bloomberg at the time.

As we’ve seen with China’s efforts to arrest the SHCOMP’s terrifying slide and as is abundantly clear from the PBoC’s willingness to intervene heavily in the onshore FX market, China is perfectly willing to force the issue when things aren’t going its way, which is why it shouldn’t come as that big of a surprise that the PBoC looks to have intervened in the offshore spot market overnight (via agency banks of course) on the way to triggering the biggest CNH rally in history. Here’s Bloomberg: