China has stepped up measures to cool the renminbi rally

China has been using measures not used since the global financial crisis to curb the currency rally as the country struggles with rising commodity prices and slowing growth, with analysts predicting more action to come.

A move by the People’s Bank of China to force lenders to hold large amounts of foreign money has shown that policymakers want to change the renminbi’s profit after touching it. strongest level against the dollar for three years last week. That marks a reversal from the years of the Trump administration, which marked Beijing a money manipulator in 2019 after the weakening of the renminbi past significant level of Rmb7 per dollar.

The central bank’s action, announced on Monday, will raise the reserves requirements of Chinese financial institutions from 5 to 7 percent of total foreign exchange deposits “to strengthen liquidity exchange management ”, According to the PBoC.

That marks the largest increase, analysts say, and the first since the global financial crisis. The strength of the renminbi has created another headache for Chinese policymakers who are already struggling with rising commodity prices and risks from large amounts of leverage across the economy.

China’s currency has strengthened nearly 11 percent against the dollar in the past 12 months. The renminbi traded abroad was slightly changed at Rmb6.3696 per greenback on Tuesday but analysts said more interventions could be made in the market.

“The aim of this move is to cool the rapid appreciation of the renminbi by reducing [foreign currency] melting of the system, ”said Becky Liu, China’s macro strategist at Standard Chartered, who estimates that the rise will drain nearly $ 20bn of liquid from the country’s foreign exchange market.

The requirements will restrict the flow of foreign currencies, making it more difficult to use the dollar to buy renminbi onshore, which could alleviate China’s currency demand.

PBoC action highlights stance against hasty respect and denomination of renminbi [at] more future steps, ”said Ken Cheung, chief Asian currency strategist at Mizuho Bank.

However, some Chinese policymakers have argued in favor of a stronger renminbi. A PBoC official this month wrote an editorial, which was later removed, arguing that the central bank should allow the money to be approved. rising global commodity prices. A stronger Chinese currency could shorten imports of raw materials abroad.

height commodity prices China’s factory gate prices were pushed and fueled fears of inflation. A cabinet meeting chaired by Premier Li Keqiang last month said steps must be taken to stop the rise in producer prices, which rose 6.8 per cent in April, driven by inflation in consumer prices. consumers, which remain low. Producer prices fell throughout part of 2020.

There are also signs that China’s rapid economic recovery from Covid-19 is slowing. On a quarter-on-quarter basis, the economy expanded only 0.6 per cent in the first three months of the year, according to the National Bureau of Statistics, very low expectations.

China’s exports, which have theoretically benefited from a weak renminbi, skyrocketed last year despite the strengthening currency. Exports rose 32 percent year -on -year in dollar terms in April, reflecting China’s dominance in global trade due to the rapid recovery from the pandemic.

However, “the broad strength of the renminbi is likely to hurt the competitiveness of China’s export sector”, Cheung added.

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