China’s renminbi hits 8-year low

Posted on November 17, 2016

China’s renminbi traded near an eight-year low against the US dollar on Thursday, as the election of Donald Trump intensified longstanding depreciation pressure.

The Chinese currency has weakened for seven of the eight trading days to Wednesday and is down 5.5 per cent in 2016 — on pace for its worst year since authorities depegged it from the dollar in 2005.

Mr Trump slammed China during the campaign for artificially weakening its exchange rate to boost Chinese exports, blaming currency “manipulation” for the US trade deficit with China. But experts say that while China actively weakened the renminbi in years past, the recent decline is driven by market forces — and government intervention is focused on curbing depreciation rather than encouraging it.

Analysts have gradually downgraded their forecasts for the dollar’s value against the renminbi this year. Median forecasts for year-end stand at Rmb6.8 compared with Rmb6.68 six months ago. Australia and New Zealand Banking Group (ANZ) on Tuesday revised its forecast to 6.9 by year end and 7.1 by the end of 2017. The renminbi was trading at 6.87 at midday on Thursday.

So what are the factors pressuring the renminbi and how is the Chinese government responding?

Strong dollar

Expectations of an interest-rate rise by the Federal Reserve in December and, more recently, the election of Donald Trump, pushed a popular measure of the dollar to a 13-year high on Wednesday. Investors expect Mr Trump to usher in tighter monetary policy, bigger fiscal deficits and higher inflation. The renminbi has closely tracked the dollar index in recent months. 

Capital outflows

Capital outflows surged last August year when China unexpectedly changed the way it guides the renminbi’s value, allowing the currency greater freedom to depreciate. But outflows moderated in the middle of 2016 as the economy stabilised and the timing of the Fed’s next rate rise was pushed back. Now outflows are picking up again. 

Amid a flurry of Chinese outbound investment deals, net outflows from foreign direct investment hit an all-time high of $31bn in the third quarter, according to balance of payments data.

In addition, “hot money” — financial capital flows not linked to trade or FDI — hit $176bn in the third quarter, the most since the fourth quarter of 2015. Hot money includes portfolio investments in stocks, bonds and insurance as well as trade credit and other cross-border lending.

Government intervention

Despite rhetoric during the US presidential campaign accusing China of deliberately weakening its currency, the People’s Bank of China has done exactly the opposite over the past two years. The PBoC has sold dollars from its foreign exchange in order to push back against market forces putting pressure on the renminbi and to prevent excessive depreciation. 

As downward pressure has increased in recent weeks, China has stepped up intervention to support the renminbi. The PBoC spent about Rmb605bn ($88bn) in September and October to prop up the redback, according to Financial Times estimates based on central bank data. That is the biggest two-month intervention since the Rmb1.4tn spent in December and January, at the height of global concern about China’s economic slowdown. The country’s foreign exchange reserves fell to $3.12tn at the end of October, their lowest level since March 2011.

Intervention explains why, despite losses, the renminbi has held up better than other emerging market currencies since Mr Trump’s election. The renminbi is down 1.2 per cent, compared with losses of 4 per cent for the Malaysian ringgit and 3.3 per cent for the Korean won. The worst-hit by Mr Trump’s victory are the Mexican peso and the South African rand, off 9 per cent and 7.7 per cent against the dollar, respectively.

Twitter: @gabewildau

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