DOWNWARD PRESSURERenminbi has been trading in a lower range since last August, when authorities decided to take a more liberal approach to setting the currency’s rate.
The People’s Bank of China announced it would take the level of the yuan at the previous day’s close into account when it sets the currency’s daily trading band, essentially taking the market’s views into account. Immediately the currency moved 1.9 per cent lower, and its downward trend has continued. The yuan was set lower again as the year began, at one stage being fixed at the lowest level since 2011. But in response to the ensuing market drama, this week the rate has been fixed slightly higher. The move seems designed to reassure investors that the currency will not be a one-way bet. But experts are still calling for renminbi to be weaker. The currency’s peg the dollar has driven it consistently higher over the last several years, and in a slower economy – and one that is less competitive – a relatively strong currency is a hindrance. “The unfortunate reality for markets is that China’s slowdown is a multi-year phenomenon and its currency has to be allowed to weaken in order for China to have a decent chance of engineering a soft landing,” says Mark Burgess of Columbia Threadneedle. While the currency is lower than last August, traders are piling on the pressure. This is best illustrated by the gap between renminbi’s two exchange rates, says Kyriakopoulou. The discrepancy between the offshore rate for the yuan, which reflects market views, and the official, onshore rate set by Chinese authorities, has widened to a record high. It shows the tension between two perspectives on where the yuan should be. “In theory, if there was a properly functioning exchange rate market there would be a barely noticeable difference between the two,” says Simon Smith of FXPro. Chinese authorities have intervened to narrow this gap in recent days by tightening liquidity in the offshore market. It caused the cost of borrowing offshore yuan to spike yesterday, making it very expensive to short the yuan. It’s another sign that China is trying to keep the currency at its preferred level.