China’s state banks stepped up selling of the dollar on Monday, supporting the renminbi against the surging US currency as the Chinese Communist party’s 20th congress got under way in Beijing.
Traders in China said large state-run banks were swapping renminbi for US dollars in the country’s forwards market, then selling the dollars in the country’s onshore markets in an intervention to bolster the domestic currency.
The renminbi was trading 0.2 per cent lower against the dollar on Monday at about Rmb7.2. But the Chinese currency has fallen almost 12 per cent against the dollar this year, with weakness becoming more pronounced after regulators relaxed informal foreign exchange trading limits in late September.
That move was followed by warnings from authorities discouraging bets on sharper falls to avoid runaway depreciation — part of an effort to slow the pace of depreciation rather than mount a strong defence of any specific level for the renminbi’s dollar exchange rate.
“This kind of intervention won’t usually have too big of an impact in the long term, but it will have an immediate, short-term impact,” said one Shanghai-based foreign exchange trader with a western investment bank.
The trader added that Beijing’s message to investors about its preferred pace for the renminbi’s decline was “pretty clear” given the central bank’s strong preference for setting the daily midpoint for the currency’s dollar trading band stronger than market expectations.
The People’s Bank of China, which every morning announces the midpoint from which the currency can trade two per cent in either direction against the dollar, has for almost two months set a stronger trading range than the consensus estimate compiled by Bloomberg.
Another Shanghai-based trader, who said the flow of dollar sales from state banks had picked up on Monday, added that Beijing was expected to prevent more serious depreciation this week given the political timing.
“The congress is meeting,” the trader said, “so the renminbi may be kept at around this level of Rmb7.2 [against the dollar].”
Another trader at a Hong Kong lender said that state banks frequently bought renminbi and emphasised that the pick-up in dollar sales wasn’t a “desperate move” related to the timing of the congress in Beijing.
Rather, the trader said, it reflected broader efforts to mitigate the impact of an interest rate differential that has opened up between dollar and renminbi assets, with the former delivering higher returns thanks to repeated rate rises by the US Federal Reserve.
Additional reporting by Cheng Leng