Currency has fallen 5% this year but investors expect further declines
China’s renminbi is flirting with its lowest level against the dollar since the 2008 financial crisis and analysts expect its strength to be further tested in the coming weeks as the country’s rebound from the pandemic splutters.
But even if the PBoC manages to squeeze out those investors betting on further declines, policymakers in Beijing still face a battle to reinvigorate theChina’s economy has not rebounded as expected after being released from three years of pandemic lockdowns. Concerns over its performance would be more than enough on their own to encourage bets against the renminbi.and a mountain of obligations coming due on local government debt.
Chinese exporters have also been converting a smaller share of their dollar earnings into renminbi, which analysts at Goldman Sachs said was “likely due to yield-seeking behaviour” as returns on dollar-denominated securities proved more lucrative than their local-currency counterparts. “From the central bank’s perspective, the real concern with a weak currency is capital flight,” said Adarsh Sinha, co-head of Asia foreign exchange and rates strategy at Bank of America.
The central bank’s biggest weapon is its control over the currency’s onshore trading band. Every morning, before China’s domestic foreign exchange market opens, the PBoC sets a midpoint around which the renminbi is allowed to trade 2 per cent in either direction against the dollar. Usually the number is adjusted to reflect changing market expectations and overnight moves in the less-regulated offshore renminbi exchange rate.
And, in a sign of how uncomfortable policymakers are with the pace of depreciation, state lenders have also been squeezing liquidity in the offshore market for renminbi forwards for the first time since 2018.
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