The renminbi lost further ground against the dollar on Tuesday, putting pressure on China’s central bank to directly intervene and deploy significant foreign exchange reserves for the first time since 2017.
The renminbi’s fall of 11.5 per cent year to date to trade at Rmb7.1631 against the dollar has come as a result of widening policy divergence between a hawkish US Federal Reserve battling inflation and dovish China working to shore up flagging growth.
Beijing has attempted to curb the currency’s depreciation and reassure markets over the country’s economic slowdown, but the renminbi has continued to slide to near a 14-year low.
The People’s Bank of China on Monday unveiled measures to discourage bets against the renminbi through derivatives markets. The rules, which force banks to post reserves when they sell derivatives contracts, are typically introduced in China during periods of currency depreciation.
The Chinese currency is on track for its largest annual fall since the country abandoned its longstanding dollar peg in favour of a floating exchange rate in 2005.
The renminbi has fared better against a broader basket of currencies from China’s trading partners, with the CFETS Renminbi index down less than 5 per cent this year.
Yet despite the potential gains for Chinese exporters from the renminbi’s weakness, analysts said investor confidence had been hit as economic growth slows due to harsh Covid-19 restrictions and mounting defaults in the cash-strapped property sector.
China’s benchmark CSI 300 index of Shanghai- and Shenzhen-listed stocks has lost more than a fifth of its value this year, while the Hang Seng China Enterprises index in Hong Kong is down more than a quarter.
“[Authorities] are always worried that if the renminbi’s depreciation gets too quick, it’s going to shake domestic confidence,” said Jingyang Chen, Asia foreign exchange strategist at HSBC. “Stability can be another reason why the PBoC needs to show its existence to the market.”
The sharp weakness in China’s currency comes just ahead of the pivotal Communist party congress in October, where President Xi Jinping is expected to secure an unprecedented third term in office.
But analysts warned that the PBoC was likely to hold off on more direct intervention in markets to support the renminbi until after the Fed had finished its current tightening cycle.
“If they intervene now, it’s useless because the fed is going to continue raising rates aggressively,” said Iris Pang, chief economist for greater China at ING. “You don’t want to waste bullets.”
