China’s central bank sets trading band for renminbi at higher level to counter currency weakness
China’s central bank, the People’s Bank of China (PBoC), has set the trading band for the renminbi against the dollar at an unexpectedly high level in an effort to combat bets against the currency as it reaches lows not seen since the 2007-08 financial crisis. This move reflects growing discomfort among senior officials with renminbi weakness, as they welcome the boost to exports that a softer currency affords but remain wary of capital outflows that could result from runaway depreciation against a strengthening dollar.
Despite the PBoC’s intervention, the renminbi fell 0.2% in early trading on Friday, reaching Rmb7.3417 against the dollar, bringing the currency down approximately 6% this year to a new 16-year low. Monetary easing to boost the Chinese economy has pushed down interest rates on Chinese government bonds relative to US Treasuries, leading to over $20 billion in foreign outflows from the country’s onshore debt market this year. This adds further downward pressure on the exchange rate.
Hui Shan, chief China economist at Goldman Sachs, explained that the central bank’s primary goal is to manage the currency’s fall as there is no option to raise interest rates to match those in the US due to sluggish economic growth. Most investors still expect the renminbi to continue depreciating.
Recent efforts by the PBoC to support the renminbi have centered around its daily fixing of the currency trading band’s midpoint, which allows the renminbi to trade 2% in either direction against the dollar. On Friday, the PBoC set the fix at Rmb7.215 a dollar, approximately Rmb0.11 stronger than analysts’ consensus forecast.
The stronger-than-expected fix comes after data revealed a fourth straight month of export contraction, causing the currency to fall below its previous low in October 2020 when China implemented widespread lockdowns to contain Covid-19 outbreaks.
Mansoor Mohi-uddin, chief economist at Bank of Singapore, highlighted the limited options available to the PBoC in supporting the renminbi and preventing a further decline that could lead to more capital outflows and worsen sentiment towards China. He emphasized that the central bank does not want to enter a vicious circle.
However, the PBoC is still under pressure to stimulate the economy and promote growth. The next major economic reading, the official consumer price index for August, will be released on Saturday, with economists forecasting a 0.2% rise from last year.
Foreign exchange strategists believe that unless Beijing implements significant fiscal stimulus or the dollar rally begins to fade, there is little chance of a turnaround for China’s currency. The perception outside of China is that Chinese investors are seeking to exit, contributing to the renminbi’s weakness.
Sean Callow, senior currency strategist at Westpac, stated that the bank is recommending going short against the renminbi due to dollar strength and the lack of evidence of a shift in sentiment towards the renminbi in markets.