China’s Central Bank moves to support the falling renminbi

The move by the People’s Bank of China (PBOC) is largely aimed at supporting the currency rather than reverse its trajectory. Market watchers expect the central bank to stick to this policy as long as the trade war with the U.S. grinds on. It will not be in China’s interest to create a stronger yuan.

With the trade war with the United states grinding on, China’s central bank raised its daily guidance rate for the Renminbi as part of its strategy to place a floor under its currency. This is the first time in 15 months that it has helped support its currency.

However, the almost 0.7% jump in the official mid-point fixing sparked heightened demands for cheaper dollars, which capped, to a large extent, gains in the spot market.

Lending more grounds to market fears, China’s central bank, the People’s Bank of China (PBOC), confirmed on Friday, that it had started changing the way it calculates the mid-point in August. This confirms investor concerns that authorities in Beijing are growing wary of a further weakening of the yuan, which suffered losses for a record 10 weeks.

According to market watchers, the Renminbi is likely to continue to depreciate further, as the trade war grinds on, and China continues to ease its policies to support its cooling economy.

Prior to the opening of the market on Tuesday, the PBOC lifted its official yuan midpoint to 6.8052 per dollar, 456 pips, which is equivalent to 0.67% rise, firmer than the previous fix of 6.8508, which largely matched market forecasts.

In terms of percentage points, Tuesday’s official guidance rate saw the biggest one-day strengthening in percentage terms of the Renminbi since June 1, 2017.

According to market watchers, the re-introduction of the “counter-cyclical factor” in the PBOC’s calculations is largely aimed at steadying the currency, rather than turn it around.

“It does not make sense to see a much stronger CNY from both the economic and trade war perspectives. In our view, the CNY’s weakness is justified as the economy is still struggling between growth, debt and leveraging,” said Zhou Hao, analyst at Commerzbank in Singapore in a note.

Incidentally, the recent easing of fiscal measures in China’s monetary policy goes to imply that there is a weaker bias for the currency; it would not be in China’s interest to artifically support a firmer yuan while the trade dispute drags on, said Hao.

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