Renminbi continues two-day rally as China's government steps in to limit capital outflows

Jasper Jolly
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China Scraps Yuan Peg To US dollar
Traders have scrambled to get their hands on renminbi (Source: Getty)

China’s currency continued its sharp two-day rally on Thursday as investors react to the prospect of tighter government controls on capital outflows announced at the end of last year.

China’s renminbi has sharply jumped off lows approaching Rmb7 to the dollar as traders and businesses rush to secure the currency outside of the country. Renminbi has risen by more than one per cent since the start of 2017.

Offshore renminbi, which represents the spot exchange for traders outside of China, appreciated at an even sharper rate, reflecting fears of tighter capital flows across the border. The spread between the Hong Kong-traded version of the currency and the official onshore version has reached its highest point since fears of a slowdown in China reached their height at the start of last year.

Read more: People's Bank of China sets renminbi fix at weakest in six years

Renminbi has suffered against the dollar in the past year, losing over six per cent over the course of 2016.

China’s government has been keen to prop up the value of its currency above the symbolic value of seven yuan to the dollar – using billions of dollars of foreign exchange reserves in the process.

The Chinese government limits daily moves in its onshore currency to two per cent either way, but it cannot control the offshore version, set up as an attempt to boost its international profile. While the two yuan measures usually track each other closely, they can diverge in more extreme circumstances.

However, the boost may be only temporary, according to David Rees, an economist at Capital Economics. He said: “We doubt that this latest bout of renminbi strength will continue for much longer.”

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