Renminbi heads for record yearly fall against the dollar

The renminbi is on course for its largest annual fall on record against the dollar despite Beijing taking its strongest steps to stem the currency’s decline, as growing monetary policy divergence between China and the US piles pressure on exchange rate stability.

The sharp weakening of the renminbi comes at a pivotal moment for China’s Communist party, which is gearing up for a leadership summit in October where President Xi Jinping is expected to secure an unprecedented third term in office.

The drop of 8.7 per cent against the greenback this year to Rmb6.96 puts the renminbi on track for its biggest annual fall since China abandoned its longstanding currency peg and moved to a managed floating exchange rate in 2005.

Policymakers have begun responding more vocally to the sell-off this year, which began when Xi’s harsh Covid-zero policy plunged the financial hub of Shanghai into a two-month lockdown in April, and accelerated in recent weeks as the dollar gained against a raft of global peers.

Analysts and economists warned that further depreciation was probable as the US Federal Reserve continues to raise interest rates at the same time that China’s central bank maintains loose policies to help steady a reeling economy.

“I don’t think authorities are going to mount any strong, line-in-the-sand type of defence of the renminbi, but they don’t want to see undue volatility,” said Mansoor Mohi-uddin, chief economist at Bank of Singapore.

Column chart of Change in dollar exchange rate (%) showing Renminbi heads for record annual fall against the greenback

Last week, authorities took the strongest steps this year to stem the renminbi’s decline, with the People’s Bank of China setting the midpoint for the renminbi’s dollar trading band at the weakest level in two years.

It also cut the level of foreign currency holdings banks must maintain, making it slightly more attractive to bet against the dollar. Such cuts are typically deployed when Beijing wishes to discourage widespread wagers against the renminbi without launching a direct intervention.

Chinese officials have expressed confidence in the currency and cautioned against speculating on depreciation. During previous stretches of weakening, Beijing has occasionally used a variety of indirect measures to strengthen the exchange rate, making it difficult to profit from the renminbi’s fall.

Liu Guoqiang, vice-governor of the PBoC, told reporters at a briefing in Beijing last week that the renminbi’s “exact exchange rate is hard to predict, and I would advise you all against gambling on it”.

“We’d like to see a reasonable exchange rate and overall stability of the market,” he added.

Analysts said that a significant driver of depreciation was the widening divergence in monetary policy between the US in China, which has undermined the attractiveness of holding renminbi assets as returns on dollar-denominated securities rise.

Despite forecasts that the exchange rate will soon slide past Rmb7 per dollar for the first time in more than two years, few expect depreciation to match that of Japan’s yen, which has fallen by about one quarter against the US currency this year.

A median forecast of economists polled by Bloomberg tipped the renminbi rate to end the year at around Rmb6.8 per dollar.

“Tolerating some depreciation allows an automatic adjustment to the historically strong dollar, said Wei He, an analyst at Gavekal Dragonomics.

“But given that China is already dealing with substantial capital outflows, the PBoC is unlikely to risk a bigger depreciation.”

Additional reporting by Cheng Leng in Hong Kong


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