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China’s renminbi hits weakest since November

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China’s onshore renminbi fell to its weakest level in six months versus the US dollar on Monday, following comments by the country’s central bank head that hinted the currency could be permitted to slide further.

In Asian morning trading hours, the onshore renminbi faded by as much as 0.4 per cent against its US counterpart to Rmb6.9352, with the Chinese currency touching its weakest point since November 2018. The onshore renminbi had suffered its worst month since July in May, weakening 2.5 per cent.

The decline in the renminbi came after Yi Gang, governor of the People’s Bank of China, told Bloomberg in an interview on Friday that no “numerical number” is more important than any other when asked if there was a red line on the currency’s exchange rate. That has prompted speculation that Chinese authorities could permit the renminbi to fall past the psychologically important level of Rmb7 to the dollar.

Mr Yi also said that Chinese officials have “tremendous” room to ease monetary policy via cuts in interest rates and banks’ reserve requirement ratios if no resolution to the country’s trade war with the United States continues to escalate.

His “comments have refuelled the speculation that the USD-CNY exchange rate could go beyond 7.0 handle sooner than expected,” said Zhou Hao, an economist at Commerzbank. 

The renminbi’s fall on Monday followed similar losses in the offshore renminbi on Friday. The onshore version of the Chinese currency didn’t trade on Friday due to a public holiday. Unlike the freely traded offshore renminbi, the onshore variant can only trade 2 per cent in either direction of a daily midpoint set by the central bank. 

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“We have seen increasing talks circulated in the onshore market in order to downplay the necessity of defending the seven [to the dollar] mark,” said Qi Gao, a currency strategist at Scotiabank. Mr Yi’s “comments suggested further downside potential for the onshore yuan interest rates and China’s government bond yields”.

Which way the currency goes next will depend heavily on the likelihood of a resolution in trade tensions between the world’s top two economies, strategists say. Investors have trained their sights on the G20 meeting in Osaka set for June 28 and 29, where hopes are pinned on the possibility of US President Donald Trump and Chinese leader Xi Jinping reaching some kind of breakthrough. 

“I am inclined to see more volatility ahead of the G20, but the USD-CNY won’t breach above 7.0 before the Osaka meeting,” said Commerzbank’s Mr Zhou. 

While a weaker renminbi could help boost the Chinese economy by supporting exporters, it also poses risks, such as inflating US-China tensions further. “After Osaka, the market needs to re-assess this hypothesis, but letting the currency go is a double-edged sword,” Mr Zhou added.

Via Financial Times

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