The renminbi is heading for a record annual fall against the dollar

The renminbi is on course for its biggest annual decline on record against the dollar despite the strongest moves by Beijing to stem the currency’s decline amid growing divergence in monetary policies between China and the US. United States puts pressure on the stability of exchange rates.

The sharp weakening of the renminbi comes at a pivotal time for the Chinese Communist Party, which is preparing for a leaders’ summit in October where President Xi Jinping is expected to secure an unprecedented third term.

The 8.7% fall against the greenback this year to Rmb 6.96 puts the renminbi on track for its biggest annual decline since China abandoned its long-standing monetary peg and moved to a rate floating exchange managed in 2005.

Policymakers have started reacting more vocally to the sell-off this year, which began when Xi’s tough anti-Covid policy plunged Shanghai’s financial hub into a two-month lockdown in April, and has accelerated in recent weeks. as the dollar gained against a raft of global peers.

Analysts and economists have warned that further depreciation is likely as the US Federal Reserve continues to raise interest rates at the same time China’s central bank maintains loose policies to help stabilize a faltering economy.

“I don’t think the authorities are going to mount a strong defense of the renminbi, but they don’t want to see excessive volatility,” said Mansoor Mohi-uddin, chief economist at the Bank. from Singapore.

Last week, authorities took the strongest action this year to stem the decline of the renminbi, with the People’s Bank of China setting the midpoint of the renminbi’s dollar trading band at the weakest level in two years.

It also reduced the level of foreign currency holdings that banks must hold, making betting against the dollar slightly more attractive. Such cuts are typically rolled out when Beijing wishes to discourage widespread betting against the renminbi without launching direct intervention.

Chinese officials expressed confidence in the currency and warned against depreciation speculation. During previous periods of weakness, Beijing has sometimes used a variety of indirect measures to strengthen the exchange rate, making it difficult to take advantage of the falling renminbi.

Liu Guoqiang, vice-governor of the PBoC, told reporters at a briefing in Beijing last week that “the exact exchange rate of the renminbi is difficult to predict, and I advise you all not to gamble on it.”

“We would like to see a reasonable exchange rate and overall market stability,” he added.

Analysts said a major driver of depreciation was the growing divergence in monetary policies between the United States and China, which has undermined the appeal of holding renminbi assets as yields on dollar-denominated securities increase.

Despite forecasts that the exchange rate will soon cross over RMB 7 to the dollar for the first time in more than two years, few expect the depreciation to match that of the Japanese yen, which has fallen by about a quarter against the US currency this year.

A median forecast from economists polled by Bloomberg tipped the renminbi rate to end the year at around Rmb 6.8 per dollar.

“Tolerating some depreciation allows automatic adjustment to the historically strong dollar,” said Wei He, analyst at Gavekal Dragonomics.

“But given that China is already facing large capital outflows, the PBoC is unlikely to risk further depreciation.”

Additional reporting by Cheng Leng in Hong Kong

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The renminbi is heading for a record annual fall against the dollar

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