Today The Financial Times (FT) made note that the gap between the Chinese renminbi’s two exchange rates (offshore RMB and onshore RMB) has widened to a record spread. This has fueled speculation that China intends to allow its currency to fall at a faster rate than has previously been seen. Since August, the People’s Bank of China (PBoC) said it would allow “market forces” to have a greater say in directing the onshore market.
The FT said that the spread between the offshore market and the more tightly controlled onshore market is an embarrassment for the People’s Bank of China, which pledged in August to narrow the gap as part of its efforts to make the Chinese currency “free floating”. China last night set the reference rate lowest since 2011, causing another flight to risk-off more for the market and sharp gains in the Japanese yen on the announcement.
The offshore renminbi (CNH) in which all Forex brokers quote outside of China fell to ¥6.72 versus the dollar today as London traders took over from Asia trading hours (see chart below). The RMB has now dropped more than 2% just this week in its steepest move since mid-August, when the PBoC shocked global markets with a surprise devaluation. The onshore rate (CNY), which can trade in a 2% band in either side of a midpoint fixed by the Chinese central bank each day, ended the official Beijing trading day at ¥6.55 (a 0.17 pip spread).
5 Year US Dollar vs. Offshore Renminbi chart, the RMB has weakened further to begin 2016, dropping over 2% versus the greenback midway through the first week of January. Chart Courtesy: Bloomberg
The FT got a hold of some quotes from top banks discussing the latest developments from China:
“During our investor meetings in December, the most significant risk that investors were worried about was a substantial devaluation of the renminbi,” wrote Timothy Moe, Goldman Sach’s chief Asia-Pacific equity strategist in a research note on Wednesday.
“It feels like the PBoC wants to keep the market on its toes”, said Mitul Kotecha, head of Asia currency and rates strategy at Barclays. “Ultimately, I don’t think it will be allowed to become a one-way bet and the unexpected volatility in the fixings could be one way of doing that.”
“The sudden movement of the dollar-renminbi fixing rate will definitely create more market volatility,” said Zhou Hao, strategist at Commerzbank. “In general, we think that the Chinese authorities will tolerate more weakness in the renminbi for the time being.”
Here is the conundrum according to FT…
The August changes were designed to act as a stepping stone for the renminbi on its path to becoming a freely-floating currency. However, pressure for faster depreciation has risen in response to a slowing Chinese economy and capital outflows as companies and investors seek more stable or appreciating currencies.
As reported in August, the PBoC was pushing for the International Monetary Fund (IMF) to grant the currency reserve status — and its fast pace of currency reform was mostly aimed at meeting IMF criteria. The renminbi attained IMF SDR basket reserve status in late November, but again FT notes “the widening gap between the onshore and offshore rates is an embarrassment for China since it suggests the renminbi is in fact not “freely usable” as the IMF requires.”
To read more check out The Financial Times by clicking here.