China extends fight against weak renminbi as drops unsettle PBOC

SHANGHAI – China took a further step to slow the slide in the renminbi, setting its daily reference rate for the managed currency at a stronger-than-expected level for a second day.

The People’s Bank of China (PBOC) stepped up its support for the renminbi with its so-called fixing, setting the rate 111 pips stronger than the average estimate in a Bloomberg survey – the largest premium since November. The onshore renminbi climbed as much as 0.5 per cent after the move.

The currency had suffered its biggest decline in nearly five months on Monday – a drop of about 1 per cent – as sentiment soured over the country’s growth prospects. The lack of more aggressive stimulus from the authorities and China’s widening policy divergence from its peers in developed nations have also weighed on the currency.

“The fixing is a strong signal that the PBOC does not like the recent excessive, one-side move especially from 7.20 to 7.25 so quickly,” said Mr Christopher Wong, a foreign exchange strategist at OCBC Bank in Singapore. “Any intervention probably only slows the pace of yuan depreciation, and 7.25 probably will be seen as the first line in the sand for now.”

Some state-owned banks and other participants mostly sold dollars after the market opened on Tuesday, according to some traders, who asked not to be identified. They pointed out that some dollar bulls also chose to take profit after the PBOC fixing.

Late on Monday, state-owned banks were seen selling dollars to shore up the renminbi’s offshore closing price, which was factored into Tuesday’s reference rate. The fixing itself limits the onshore renminbi’s moves by 2 per cent on either side.

Pressure on the renminbi will gradually ease as the economy improves due to pro-growth measures, state-owned China Securities Journal said in a report on Tuesday. It will then revert to the normal state of two-way moves, the newspaper said.

The onshore renminbi gained 0.3 per cent to 7.2223 as at 10.16am in Shanghai, while the offshore renminbi was up 0.2 per cent. The shift in sentiment also helped boost stocks in Hong Kong and push China-linked assets like the Australian dollar higher.

“We believe the main interest of the PBOC is to maintain a low-interest environment in the onshore market, which is not compatible with a stronger yuan,” said Societe Generale strategist Seong Kiyong. “The PBOC is likely to set the fixing stronger than the consensus on a sporadic basis. I don’t believe it will be a game changer, though.” BLOOMBERG