China central bank intervention pushes renminbi to 6-month high

China’s currency headed for its biggest two-day gain against the dollar since January on Thursday afternoon, as the central bank apparently intervened to support the renminbi amid tepid market demand for the Chinese currency.

Traders said that large state-owned banks sold dollars aggressively on Wednesday and Thursday. Such concerted trading is usually viewed as a sign that these institutions are acting on behalf of the central bank to prop up demand for the renminbi. 

The People’s Bank of China’s currency-trading arm last week announced a change to the way it sets renminbi’s daily fix, which is intended to guide trading in the spot market. The change granted the PBoC greater flexibility to push back against what it called “irrational expectations” and guide the renminbi stronger, even when market forces are pushing the other way.

After a record 6.5 per cent decline against the dollar in 2016, the renminbi has gained 2.3 per cent this year, including 0.9 per cent over the last two days. At 6.889 per dollar at midday on Thursday, the renminbi was at its strongest level since November.

Given the currency’s stability this year, some analysts were baffled by the PBoC move to guide the renminbi even stronger. But traders say that authorities are concerned that client demand remains strongly tilted towards dollar purchases, a holdover from last year’s big depreciation. 

“The renminbi has traded in a very narrow range this year. But if you look at real demand in the market, it’s still mostly dollar demand. Market expectations haven’t fundamentally shifted,” said a foreign exchange trader at a European bank in Shanghai. 

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Capital outflows were a major source of downward pressure on the renminbi last year. But outflows diminished substantially in the first quarter following the imposition of tighter capital controls

Even so, corporate purchases of foreign exchange have continued to exceed renminbi purchases this year, including a gap of $12.8bn in April, according to the State Administration of Foreign Exchange. 

Even before last week’s announcement, the PBoC had begun to set unusually strong fixings. Since early 2016, the fixing mechanism had become increasingly transparent, with banks able to predict its level in advance. But that pattern has weakened in recent weeks, with fixings consistently coming in stronger than expected. 

“The gap between market expectations and the actual fixing is a clear signal that the PBoC’s policy preference is for a stronger currency,” said Raymond Yeung, chief greater China economist at Australia and New Zealand Bank in Hong Kong. 

The PBoC fixed the renminbi 0.8 per cent stronger on Thursday, the biggest one-day gain since January and the strongest level since November. 

Some analysts speculate that moves to strengthen the currency are also an effort to boost confidence following the downgrade of China’s sovereign credit rating by Moody’s last week. Recent data also indicate that China’s economy is slowing following a strong start to 2017.

In December 2015, the PBoC announced that it would shift away from targeting renminbi stability against the US dollar and instead focus on maintaining “basic stability” against a trade-weighted basket of global currencies. 

On that measure, the renminbi has weakened this year. As the dollar index has retreated, the renminbi’s relative stability against the greenback has caused the Chinese currency to weaken against other currencies.

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