HONG KONG - China sent its most powerful signal yet on its discomfort with the renminbi's weakness by setting its reference rate for the currency with the strongest bias on record. The People's Bank of China (PBOC) set the fix at 6.9160 per US dollar, 454 pips stronger than the average estimate in a Bloomberg survey of analysts and traders.
The bias was the largest on the strong side since the daily survey was initiated in 2018. The move also marks the 11 straight day of stronger-than-expected fixings by the central bank to rein in the renminbi that is weakening towards the key 7 per dollar level that was last touched in June 2020.
The central bank had also cut the reserve ratio for foreign exchange deposits for financial institutions for the second time this year on Monday to support the currency.
"The Chinese authorities are leaving no doubt about their resolve to dampen depreciation pressure on the renminbi," said Mr Khoon Goh, head of Asia research at Australia and New Zealand Banking Group.
"What is also clear is that the authorities are not seeking to defend any particular level, as the fixings are still being set weaker in the face of dollar strength," he added.
The renminbi is under pressure to fall as Covid-19 lockdowns in major cities and stress in the property sector weigh on the economy.
Bets on aggressive rate hikes by the Federal Reserve are also widening China's monetary policy gap with the US and driving outflows.
Surging Treasury yields have enlarged the gap between US 10-year bonds and Chinese government notes of the same tenor to the widest since 2009, reducing the appeal of Beijing's debt.
The depreciation comes at a sensitive time for Beijing, which is preparing for a twice-a-decade party reshuffle next month. That is why keeping the foreign exchange market steady is paramount for the authorities, as a disorderly plunge in the renminbi could spill over to stocks and endanger financial stability.
"Stronger-than-expected fixing shows the PBOC's determination to keep the renminbi basically stable ahead of the National Party Congress," said foreign exchange strategist Qi Gao at Scotiabank in Singapore. "The Chinese central bank will continue to be able to smooth excessive movements in the renminbi exchange rate but will not firmly defend a certain level such as 7."
The PBOC is more concerned about the pace and magnitude of the renminbi's depreciation or appreciation, instead of the currency breaching a specific level against the dollar, the Securities Times says in a front-page commentary on Wednesday.
As the exchange rate's two-way moves continue to expand, renminbi at 7 to the dollar may no longer be a focus for the markets in the future even though it is seen as a key level now, it said.
Despite its drop versus the dollar, the renminbi remained steady versus a basket of peers - a sign that the depreciation was mostly triggered by a surge in the greenback rather than bearish bets towards China assets. The currency was around the same level seen three months against an index of 24 other exchange rates, according to data compiled by Bloomberg.
The offshore renminbi remained weak despite the strong signal from the PBOC, with the currency falling 0.2 per cent to 6.9838 per dollar. It declined 0.2 per cent to 6.9704 at 9.46 am in Hong Kong.
The selling momentum on the Chinese currency is the most aggressive since May, according to the 14-day dollar-renminbi Relative Strength Index. However, there is limited signs of panic, with gauges of expected swings on the currency remaining low. BLOOMBERG