SHANGHAI (Reuters) – China’s central bank, which had spent a year trying to end the yuan’s decline, suddenly found itself facing the opposite problem and was looking for subtle ways to stem the currency’s rapid rise.

The usually reserved yuan gained 1.3% against the dollar in August, recouping almost all of its losses from the first half of the year. On Friday, it looked set to post a fifth straight weekly gain, its longest streak of gains in more than three years.

While neither of the main factors driving the domestic crisis, namely a faint economy and capital flight, have changed, the yuan has been helped by rising expectations of interest rate cuts by the Federal Reserve, which are weakening the dollar, as well as a rise in the value of the Japanese yen.

Meanwhile, Chinese authorities have been working behind the scenes to ensure the currency doesn’t soar, which could rattle brittle domestic financial markets and hurt exporters. They’ve conducted market surveys to gauge the pressure and quietly eased restrictions on gold imports and yuan-denominated trading positions for some banks.

“The government is probably less concerned about depreciation, but is still concerned about currency volatility,” said Gary Ng, senior Asia-Pacific economist at Natixis.

“While pressure on the yuan may ease as the Fed may finally cut interest rates, there could be sudden and significant changes in capital flows.”

One of the main concerns for the People’s Bank of China (PBOC) is the build-up of speculative miniature positions in the yuan amid the currency’s steady decline since early 2023, which could be reversed sharply if the currency begins to appreciate rapidly.

Foreign companies operating in China, domestic exporters and investors exchange yuan for dollars to earn better returns in a transaction known in market circles as the yuan carry trade.

Analysts at Macquarie Group (OTC:) estimate that exporters and international corporations have accumulated foreign currency holdings worth more than $500 billion since 2022.

“As the yuan appreciates… there may be concerns about a potential end to the yuan carry trade and shocks to financial markets,” said Zhu Chaoping, global market strategist at JP Morgan Asset Management.

“Recent market volatility in Japan may have reminded policymakers of these risks.”

China’s currency regulator, the State Administration of Foreign Exchange (SAFE), and the PBOC did not immediately respond to Reuters’ request for comment.

PREVENT PANIC

Perhaps to get a sense of the glut of yuan purchases that could come with a rising currency, SAFE last week surveyed banks on their clients’ currency conversion rates, or the proportion of exporters’ revenues that are converted into yuan, two people with direct knowledge of the matter told Reuters.

“Currency settlement is the issue that worries everyone in the market the most, apart from the Federal Reserve’s interest rate cut,” said Liu Yang, general manager of the financial markets department at minerals exporter Zheshang Development Group.

“After all, exports are the only major driver of China’s economy among the traditional ‘troika’ (traditional growth engines), and regulators do not want the yuan to appreciate quickly and significantly, which would weaken the competitiveness of export products,” he said.

Some banks have also relaxed guidelines issued last year prohibiting them from holding miniature yuan positions at the end of the trading day, two people with direct knowledge of the matter told Reuters.

Chinese banks also received modern gold import quotas from the central bank, Reuters reported. Gold imports are typically curbed when the yuan faces depreciation pressures.

Analysts say the measures are subtle and, along with the trend in the PBOC’s daily yuan guidance, simply indicate a desire to curb volatility rather than curb gains.

However, market participants are still revising their forecasts for the yuan.

Analysts at BofA Securities expect the yuan to continue to weaken “given muted growth and the PBOC’s easing stance,” but see the yuan at 7.38 per dollar by year-end, rather than 7.45 as previously forecast. It currently trades at about 7.14 per dollar.