Home ForexDaily Briefings China shores up renminbi ahead of leaders' summit in March

China shores up renminbi ahead of leaders' summit in March

by SuperiorInvest

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Chinese regulators are taking steps to keep the renminbi's exchange rate against the dollar stable as Beijing seeks to bolster confidence in the country's currency and economy ahead of a key leadership summit.

Measures taken by the authorities (such as postponing short-term interest rate cuts and holding firm the dollar's trading band even as the spot price approaches its official floor) have helped prevent further declines in the currency, which has fallen 1.4. percent this year to approximately 7.1 RMB per dollar.

Those efforts come as markets await possible political signals from the “two-session” meeting of top Communist Party cadres in Beijing, which begins on March 4 and where authorities have historically sought to minimize market volatility.

Strategists and analysts said the People's Bank of China was focused on fending off near-term pressure from the interest rate differential between Chinese and U.S. government debt, which has widened this year as expectations of a imminent rate cut by the US Federal Reserve.

Higher yields on dollar debt relative to renminbi bonds fueled capital outflows from China's bond market for much of last year, piling downward pressure on the Chinese currency.

Mansoor Mohi-uddin, chief economist at the Bank of Singapore, said China's decision last week to cut its five-year mortgage-linked lending rate, without changing the one-year rate, showed top leaders were wary of a more flexible monetary policy, which could risk widening the interest rate differential and further weakening the exchange rate.

“They are clearly focused on the exchange rate implications of easing monetary policy for the renminbi,” Mohi-uddin said. “What the People's Bank of China is doing is trying to buy time until the Federal Reserve starts cutting rates.”

In line with analyst expectations of an eventual easing of US rate cuts later in the year, forward markets are tipping the renminbi to finish the year slightly stronger against the dollar at around RMB 7.

Ju Wang, head of China foreign exchange and rates strategy at BNP Paribas, said Beijing was already demonstrating a clear preference for a stable exchange rate through its daily fixing of the renminbi's dollar trading band, around the which the currency trades 2 percent against the dollar in either direction.

“The fixing pattern is very stable and for the second half the rate differential will narrow,” Wang said. “But in the second half there are the US presidential elections, and if [Donald] Trump wins. . . “China would allow the currency to adjust proportionately to any tariff.”

Trump, the Republican front-runner, has said he could impose a 60 percent tariff on Chinese imports if elected in November.

“That essentially means we are at the end of the era of normal trade between the United States and China,” Wang said, predicting the renminbi would fall at least 10 percent from its current level to about RMB 8 against the dollar.

Economists at Capital Economics have forecast an even steeper drop against the dollar, of around 18 percent to 8.5 yuan, if Trump follows through on his tariff threat.

“Donald Trump's previous tariffs caused surprisingly little damage to China's economy,” they wrote in a recent note, “but China may find it harder to ignore the damage in a revenge.”

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