China takes more visible measures to slow its currency’s descent

The People's Bank of China said it would cut the foreign exchange reserve requirement ratio to 6 per cent beginning Sept 15. PHOTO: REUTERS

BEIJING - China set a stronger-than-expected renminbi fixing for a 10th day and said it will allow banks to hold less foreign currencies in reserve, its most substantial moves yet to stabilise the weakening currency.

The People’s Bank of China (PBOC) set the renminbi’s reference rate at 6.9096 per US dollar on Tuesday, trailing behind the currency’s move to a two-year low. This came a day after the central bank said financial institutions will need to hold just 6 per cent of their foreign exchange in reserve from Sept 15, effectively increasing the supply of dollars and other currencies onshore. The decrease of 2 percentage points is the biggest in data going back to 2004. 

While the moves should limit the renminbi’s declines against the greenback, they do little to suggest that the central bank is trying to reverse the losses.

The authorities may want to slow down the pace of depreciation, but they are not “drawing a line in the sand to hold any particular level for now”, said Mr Khoon Goh, head of Asia research at ANZ. 

The question is whether there will be more firm action from the authorities should the renminbi start to approach the psychological 7-per-dollar level, he said.

Betting against the renminbi has been a successful strategy in the past month. The currency has plunged 2.5 per cent against the US dollar as China’s Covid-19-zero strategy hurt an already fragile economy and aggressive rate hikes by the United States quicken capital outflows. In the year to date, the Chinese currency has lost 8 per cent against the greenback.

The depreciation comes at a sensitive time for Beijing, which is preparing for a twice-a-decade party reshuffle next month. This 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. 

The PBOC has stepped up efforts to stem renminbi depreciation in the past two weeks. Stronger-than-expected fixings for 10 straight sessions mark the longest run of strong biases since 2019.

Monday’s cut in the foreign exchange deposit ratio was twice as large as April’s reduction. Also on Monday, PBOC deputy governor Liu Guoqiang told reporters in Beijing that China was able to maintain the renminbi at a stable level, adding that it will be a “norm” in the short term for the Chinese currency to move in two ways.

The onshore renminbi was little changed at 6.9357 as at 10.54am in Beijing. The 6.9-per-dollar reference rate was being closely watched by currency traders as it had resulted in steep renminbi losses in the past. BLOOMBERG

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