Beijing tightens grip on renminbi after stimulus rally

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A strong rise in the renminbi is testing Beijing’s currency management policies after China’s stimulus plans and the US Federal Reserve’s adoption of lower interest rates sent Asian currencies higher against the US dollar.

The renminbi spot exchange rate has moved closely in sync with an official “fix” set by the central bank in recent weeks, indicating Beijing is reasserting its grip on the currency as the US presidential election looms.

The People’s Bank of China has kept the official rate between 7.1 and 7.2 to the dollar for most of this year, even as the spot renminbi remained within a 2 percent trading band around the fix.

But in the past month, it has allowed much more correctional movement as the renminbi rose to 7 against the dollar on a spot basis, a sign that Beijing is projecting a controlled appreciation to cushion the effects of a rush back to Chinese assets abroad. .

“While the Chinese authorities likely welcome a shift away from the relentless renminbi depreciation pressures that existed for most of 2023 and 2024, they are also likely to be keeping an eye on the pace of further appreciation,” said Nathan Swami, Head of FX. trading for Asia Pacific at Citi.

Swami added that a further rise in the currency could undermine the competitiveness of Chinese exporters, who hold significant amounts of US dollars.

This year, the central bank has disguised its market interventions by pushing state-owned banks to buy dollars during surges in currency markets, such as August’s collapse in carry trades. Net foreign assets of state-owned banks rose that month, a sign that such interventions were likely to have taken place.

China’s offshore renminbi, which trades more freely than its onshore counterpart, fell below 7 to the dollar late last month for the first time since May 2023 as authorities unleashed a blitz of stimulus to revive the economy and buoy markets. capital of the country.

The strong rise in the offshore currency confused many foreign investors who had taken short positions. Analysts at Goldman Sachs last week ended their short recommendation on the currency, noting that the stimulus “seems to squeeze remaining (renminbi) shorts.”

A trader at a major Western investment bank said he had seen the currency’s rise exacerbated by investors closing out their short positions.

“As the authorities do more to support growth, the renminbi has strengthened on the back of that,” said Manik Narain, head of emerging markets strategy at UBS, who pointed out that at just above 7 to the dollar, the renminbi still remains “more closer to the 10-year low than the 10-year high”.

Analysts said Beijing could also maintain a tight grip on the currency through a US election that could drastically change the dollar’s trajectory if voters back Donald Trump’s policies of high tariffs that could weaken China’s export economy and could strengthen the greenback.

“As the US presidential election approaches, some likelihood of higher US tariffs being imposed on China later needs to be priced into the currency,” FX strategists at Macquarie said. “Even if these tariffs do not ultimately materialize, China’s own internal struggles still argue for continued (currency) weakness until policy stimulus begins to bear fruit.”

“On the eve of the US election, we expect (the offshore exchange rate) to settle nervously near 7.10, moving higher towards 7.30 by early 2025 on a possible Trump victory, or falling to 6.95 if (Kamala) Harris wins instead.”

But China’s dollar war chest remains formidable.

China’s foreign exchange reserves stood at about $3.3 billion in September and many of its exporters have collected dollars from overseas business. Chinese state banks last week bought dollars in the onshore market to slow the rise of the renminbi.

The Malaysian ringgit, Thai baht and Indonesian rupiah have also risen in recent weeks as the Fed’s interest rate cut in September sent investors looking for high-yielding assets in Asia. Despite a rebound in the dollar amid escalating conflict in the Middle East, many analysts expect continued appreciation in Asian currencies.

“The tide is turning for weak Asian currencies and with the US pressure cooker no longer there, we are bearish on the dollar,” said Trinh Nguyen, senior emerging Asia economist at Natixis.

Nguyen added that a stronger Chinese economy could benefit other Asian currencies, particularly those of countries that count China as a top trading partner, such as Indonesia, or whose tourism economies depend in part on Chinese visitors, such as be Thailand

“Chinese consumers will open their wallets if they feel more confident. These factors are quite supportive for emerging Asia.”