China’s new renminbi level set to pressure Asia currencies
China’s central bank set the midpoint for the renminbi’s trading band above 7 to the dollar on Thursday for the first time since the global financial crisis, allowing further weakness in a move that could drag down currencies across the Asia-Pacific region.
But the renminbi was slightly stronger on the day, climbing 0.2 per cent against the dollar at Rmb7.042 in late-morning trading after the People’s Bank of China set the midpoint, around which the currency can trade 2 per cent in either direction, at Rmb7.0039.
Ken Cheung Kin Tai, Asian foreign exchange strategist at Mizuho Bank, said that while setting the fix above seven was “official confirmation” of the currency entering a new normal trading range, PBoC had in effect achieved a “soft landing of renminbi depreciation”.
Unlike the renminbi’s world-shaking drop in 2015, there is little concern that the situation could spiral out of Beijing’s control. In that year, the move to lower the fix by 4.7 per cent over the course of just two days sparked huge capital outflows from China and forced the central bank to burn through hundreds of billions of dollars to prevent a sharper dive.
“The Chinese can and will be very creative in finding ways around any rules that are put in place but [policymakers] seem to have done a good job in cracking down on forex violations,” said Paul Gillis, an accounting professor at Peking University’s Guanghua School of Management.
Official data released on Wednesday revealed little change in China’s foreign exchange reserves, which held basically stable in July at $3.1tn.
But economists at Capital Economics wrote in a recent note that capital outflows had “almost certainly picked up” after the Chinese currency crossed Rmb7 to the dollar. They added that the “resumption of PBoC forex sales is a distinct possibility in the coming months”.
Even so, few expect the kind of runaway depreciation seen after the 2015 devaluation, which ultimately took the currency almost 12 per cent lower against the dollar by the end of 2016.
“The situation now is quite different,” said Shaun Roache, chief Asia-Pacific economist at S&P Global Ratings.
He said tighter capital controls introduced by the central bank in the wake of the 2015 devaluation were largely working as intended, while market expectations for a hard landing in China were nowhere near previous levels.
But he added that the renminbi’s fall was likely to weigh on other Asia-Pacific currencies more than it had in previous years. “Over time, the dollar has become less important for a range of currencies across the region,” he said.
Mr Roache pointed to research by S&P that suggested the emergence of a nascent “renminbi bloc” in recent years, with the impact of the renminbi’s moves on other currencies, including the Australian dollar, South Korean won, Indonesian rupiah and Indian rupee either increasing or in some cases outweighing that of the dollar.