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China is resorting to measures not used since the global financial crisis to temper a rise in its currency as the country struggles with rising commodity prices and slowing growth, with analysts forecasting more actions to come.
A measure by the People’s Bank of China that will force lenders to hold more foreign currency indicates that policymakers want to curb the renminbi’s gains after the renminbi touches its stronger level against the dollar in three years last week. This was an investment of the years of the Trump administration, which he described Beijing as currency manipulator in 2019, after the renminbi weakened above the important Rmb7 level per dollar.
The central bank’s action, announced on Monday afternoon, will raise the required reserves of Chinese financial institutions from 5 to 7% of total foreign currency deposits “in order to strengthen the management of foreign exchange liquidity,” according to the PBoC .
This is the largest increase in history, analysts said, and the first since the global financial crisis. The strength of the renminbi has created an additional headache for China’s policymakers who are already facing rising commodity prices and the risks posed by high amounts of leverage across the economy.
The Chinese currency has strengthened almost 11% against the dollar in the last twelve months. The renminbi traded on the ground changed little, to Rmb6.3696 per green dollar on Tuesday, but analysts said there are likely to be more interventions in the foreign exchange markets.
“The measure aims to cool the rapid appreciation of the terrestrial renminbi by reducing it [foreign currency] liquidity in the system, “said Becky Liu, China’s macro strategist at Standard Chartered, who estimated the increase would drop about $ 20 billion in liquidity in the country’s foreign exchange market.
The requirement will restrict the domestic supply of foreign currencies, making it difficult to use dollars to acquire renminbi on the ground, which may reduce demand for the Chinese currency.
“The action of the PBoC highlighted its position against the rapid appreciation and renminbi advice [at] new measures imminent, ”said Ken Cheung, Asian currency strategist at Mizuho Bank.
However, some political leaders in China have advocated a stronger renminbi. A PBoC official wrote an editorial this month, which was later deleted, arguing that the central bank should let the currency appreciate to counter it. rising world commodity prices. A stronger Chinese currency could lower its imports of raw materials abroad.
Higher commodity prices they have raised factory prices in China and sparked fears of inflation. At a cabinet meeting chaired by Premier Li Keqiang last month, it was said that steps should be taken to stop producer price inflation, which rose 6.8% in April, passing to consumer price inflation, which remains low. Production prices fell for most of 2020.
There are also indications that China’s strong economic recovery from Covid-19 is cooling. On a quarterly basis, the economy increased by only 0.6 percentt during the first three months of the year, according to the National Statistics Office, well below expectations.
China’s exports, which in theory benefit from a weak renminbi, have grown over the past year despite the currency’s strengthening. Exports rose 32% year-on-year in dollar terms in April, reflecting China’s dominance in world trade, given its rapid recovery from the pandemic.
However, “the broad renminbi force is likely to undermine the competitiveness of China’s export sector,” Cheung added.
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