China’s central bank guided the renminbi higher by the most in 20 months yesterday, prompting speculation that Beijing has decided to reverse the biggest depreciation in the currency’s recent history.
The People’s Bank of China set the renminbi midpoint at 6.1485 to the dollar, an appreciation of 0.22 per cent from Friday’s 6.1623 and the strongest rate since March.
Compared with movements of more market-determined currencies, that might seem minuscule, but it was a great leap for China’s tightly controlled exchange rate.
Since it hit an all-time high against the dollar in January, the renminbi has depreciated more than 3 per cent, driven down by active intervention from the central bank, which manages the currency within a narrow band.
That is the strongest depreciation since Beijing unpegged the currency from the dollar in 2005 and allowed it gradually and steadily to appreciate about 30 per cent.
Yesterday’s appreciation signal came after China recorded a monthly trade surplus of $36bn in May, its biggest monthly surplus in five-and-a-half years, according to official data released at the weekend.
Exports rose 7 per cent in May from a year earlier while imports fell 1.6 per cent, suggesting weakness in the domestic economy.
Such a large trade surplus will increase pressure from the US, which has long complained that China interferes in the market to keep its currency artificially weak and to make its exporters more competitive.
Jacob Lew, US Treasury secretary, was in Beijing last month to highlight Washington’s concern over the run of depreciation.
Yesterday’s sharp appreciation by the central bank may have been intended to head off US and international pressure in the wake of the latest trade figures.
It may also be part of the central bank’s long-term plan to allow the market gradually to take a larger role in determining the exchange rate.
“We know the [PBoC] wants more volatility but not too much volatility,” said Stephen Green, chief economist for Greater China at Standard Chartered bank.
“The policy they outlined at the end of last year consisted of widening the trading band, reducing intervention in the market, allowing more volatility and allowing the market to feel what it is like to have more volatility.”
The PBoC’s main motivation in driving down the value of the renminbi in recent months appears to have been a desire to punish speculators, who had been fuelling large capital inflows through bets on continued one-way appreciation of the currency.
Such speculative inflows, which had been complicating Chinese monetary policy, have dwindled in recent months and may have gone into reverse. This has allowed Beijing quietly to declare victory and halt depreciation.
However, market expectations of continued depreciation could be equally problematic for China and its capital controls if they led to capital flight.
The renminbi spot rate increased about 0.17 per cent yesterday, increasing the gap between the fix and the spot.
This suggests that the Chinese currency might weaken further in the absence of official support.
“我们知道（中国央行）希望有更多波动，但又不能有太大波动，”渣打(Standard Chartered)大中华区研究部主管王志浩(Stephen Green)表示。