A historic rally in China’s renminbi cooled on Monday after the country’s central bank made it less costly to bet against the currency.
The renminbi’s onshore exchange rate fell as much as 0.5 per cent to Rmb6.7276 against the dollar after the People’s Bank of China announced on Saturday lenders would no longer be required to hold reserves when buying foreign currency forward contracts.
The renminbi jumped as much as 1.5 per cent against the greenback on Friday, its biggest one-day rise in 15 years as demand for Chinese assets and hopes for a reset in relations with Washington under a Joe Biden presidency buoyed the currency.
The announcement on Saturday reversed a policy imposed in August 2015 shortly after China devalued its currency without warning, which at the time sent a shudder through global markets and stoked speculation the renminbi could fall further.
By requiring banks to hold 20 per cent of the amount of a foreign exchange forward transaction, the 2015 policy raised the cost for investors to bet against the renminbi as it came under pressure from massive outflows.
But Saturday’s announcement lowering that requirement from 20 per cent to zero did not necessarily favour bets against the renminbi, said Michelle Lam, Greater China economist at Société Générale.
“This move by itself does not have any implications for the renminbi going up or down,” she said. She added that the drivers of the currency’s recent strength — chief among them higher onshore interest rates that have encouraged foreign purchases of renminbi bonds — remained in place.
Frances Cheung, head of macro strategy for Asia at Westpac, said the excessive capital outflows that prompted the reserve requirement to be introduced five years ago had since been staunched. “We do not read too much into the implications on China’s stance” on its currency, she said.
But Ken Cheung, chief Asian foreign exchange strategist at Mizuho Bank, said the timing of the latest policy change showed Beijing might view excessive renminbi strength as a risk if Mr Biden beats incumbent Donald Trump, a vocal critic of China, next month.
“As a result, the PBoC took a pre-emptive action to slow the pace of renminbi appreciation” to avoid damaging China’s economic recovery from coronavirus, Mr Cheung said. However, he believes that the currency will still continue to inch higher.
The less-regulated, offshore-traded renminbi fell as much as 0.7 per cent against the dollar before trimming losses to be 0.4 per cent lower at Rmb6.7145.
Meanwhile, China’s CSI 300 index of blue-chip stocks gained 2.7 per cent on Monday. That was after state news agency Xinhua published official plans to build a “socialist pilot zone with Chinese characteristics” in Shenzhen over the next five years, ahead of an expected visit to the southern city by President Xi Jinping this week.
Hong Kong’s benchmark Hang Seng index added 2.2 per cent.
Ms Lam, at SocGen, said anticipation of more detailed policy plans to encourage innovation and further liberalisation of China’s economy was helping to boost investor sentiment.
“Shenzhen is always the pioneer in terms of opening-up reforms and this happens to be the 40th anniversary of [the] opening up for Shenzhen,” she said, referring to the creation of a special economic zone in the city in 1980.