China effectively curbed a potential run on the yuan in 2023 through strategic interventions, a departure from its 2015 approach when significant reserves were depleted to stabilise the currency.

In recent months, the People's Bank of China (PBOC) adopted moral suasion, guiding market participants and state banks to prevent strong downward pressure on the yuan. This nuanced strategy, involving specific directions to banks and targeted interventions, contrasted with the 2015 approach of official intervention.

Despite China's economic challenges and capital outflows, the PBOC communicated its intentions to markets, signalling tolerance levels for yuan depreciation.

The official non-manufacturing Purchasing Managers' Index (PMI) rose from 50.2 in November to 50.4 in December, reflecting a broader recovery in services and construction.

Market participants reported instances of state-owned banks discreetly buying yuan to counter downward momentum, particularly around crucial currency levels. This strategic approach, aiming to contain volatility, was observed during critical junctures, such as in late May and December when state banks increased yuan buying.

The PBOC's use of "non-standard measures" was described as a form of "triage" to prevent rapid yuan depreciation. 

While successful in stabilising the currency, concerns were raised about the chilling effect on China's foreign exchange market, leading to decreased trading volumes and questions about the yuan's global reserve currency prospects.

Traders noted a divergence between the PBOC's daily yuan guidance and market expectations, signalling the central bank's reluctance to allow the currency to follow market forces. This contrasted with 2015, when official reserves were extensively used to stabilise the yuan amid fears of further devaluations.

Regulators, including the State Administration of Foreign Exchange, reportedly issued "window guidance" to reduce dollar holdings, and major state-owned banks were instructed to cut dollar deposit rates to encourage switching to yuan. 

Additionally, exporters faced heightened scrutiny, with regulators conducting frequent surveys to monitor their foreign exchange plans.

Despite a notable slump in onshore yuan trading volume, the currency stabilised above its September 16-year low.

Market participants, while cautious about directly opposing the PBOC, remain watchful of yuan trends, reflecting ongoing uncertainties in China's foreign exchange landscape.

(With Reuters Inputs)