Renminbi falls against the dollar despite fresh support measures

The renminbi continued to lose ground against the dollar on Tuesday, putting pressure on the People’s Bank of China to intervene directly and deploy significant foreign exchange reserves for the first time since 2017.

The renminbi’s 11.5 percent year-to-date fall to RMB7.1631 against the dollar is the result of widening policy divergence between a hawkish Federal Reserve battling inflation and a dovish China working to support slowing growth.

Beijing has tried to stem currency depreciation and reassure markets amid the country’s economic slowdown, but the renminbi has continued to fall to near a 14-year low.

The People’s Bank of China on Monday unveiled measures to ban betting against the renminbi through derivatives markets. Rules forcing banks to reserve when selling derivative contracts are typically introduced in China during periods of currency devaluation.

The Chinese currency is on course for its biggest annual decline since the country abandoned its long-standing dollar peg in 2005 in favor of a floating exchange rate.

The renminbi has outperformed a broader basket of currencies from China’s trading partners, with the CFETS renminbi index down less than 5 percent this year.

But despite the potential gains for Chinese exporters from renminbi weakness, analysts said investor confidence has been hit as economic growth has slowed amid tight Covid-19 restrictions and rising defaults in the cash-strapped real estate sector.

China’s benchmark CSI 300 index of stocks listed in Shanghai and Shenzhen has lost more than a fifth of its value this year, while Hong Kong’s Hang Seng China Enterprises Index has fallen by more than a quarter.

“[Authorities] are always concerned that too rapid renminbi depreciation could shake domestic confidence,” said Jingyang Chen, Asia FX Strategist at HSBC. “Stability may be another reason why the PBoC needs to show its existence to the market.”

The Chinese currency’s sharp weakness comes just ahead of October’s crucial Communist Party congress, where President Xi Jinping is expected to serve an unprecedented third term.

However, analysts warned that the PBoC would likely wait until the Fed completes its current tightening cycle before intervening more directly in the markets to support the renminbi.

“If they intervene now, it’s pointless because the Fed will continue to raise interest rates aggressively,” said Iris Pang, chief economist for Greater China at ING. “You don’t want to waste bullets.”