China strengthened the renminbi’s trading range on Friday by the most since it depegged it in 2005, as investors awaited data expected to show Beijing is continuing to burn through its reserves to support the currency.
The renminbi’s sudden strength has caught global markets off-guard and wrongfooted investors betting the Chinese currency would start the year by continuing its gradual slide as outflow pressures persisted in spite of Beijing’s efforts to curb them.
Following the biggest-ever two-day surge in the offshore version of the renminbi, the People’s Bank of China on Friday fixed the midpoint for the onshore market 0.9 per cent stronger at Rmb6.8668 per US dollar.
It is the biggest increase in the fix since July 22, 2005 when the PBoC depegged the renminbi from the US dollar and allowed it to move more freely, albeit within a daily trading band.
Analysts said the sharp strength in the daily “fix” was largely expected following the offshore renminbi’s sudden rally. Onshore, the renminbi is permitted to trade 2 per cent either side of its midpoint. The offshore market, which has no such restrictions, was introduced in 2010.
In early afternoon trading in Hong Kong, the offshore renminbi was at Rmb6.8223 against the dollar, off a strong point of Rmb6.7826, while its onshore cousin was at Rmb6.9086 after touching Rmb6.8694.
For 2016, the offshore renminbi fell 5.8 per cent against the dollar while its onshore cousin dropped 6.6 per cent, touching its lowest levels in eight years.
China is due at the weekend to release data on its December foreign reserve holdings. November’s fall of $70bn — the largest in 10 months — was taken as a sign of rising outflow pressures, sparking debate about just how much the People’s Bank of China was prepared to burn through to slow the renminbi’s slide.
Last month, however, China introduced a series of measures to tighten capital controls and reduce outflows by limiting cross-border payments. This week, it imposed extra paperwork on citizens planning to use their annual $50,000 foreign exchange limit, which reset at the start of the year.
“I don’t think it changes the long-term renminbi decline story, but I’d expect this type of challenging market is going to persist into the lunar new year holiday” [at the end of January], said Paul Mackel, HSBC’s head of emerging markets FX research. “You have this tougher regulatory environment on the mainland and you have investors more in tune with the risks of long dollar, short-renminbi positions — it’s painful when it happens, but this move was not entirely unexpected.”
The speed of the renminbi’s advance this week has been exacerbated by thin liquidity in the offshore market, increasing the scramble for the currency when the price began to rise.
That intensity was clear on Friday when the overnight cost of borrowing renminbi offshore in Hong Kong almost doubled to 61.333 per cent from Thursday’s levels. The rate is typically between 1 and 2 per cent.
Globally, offshore deposits of renminbi have dropped 22 per cent in the past year, according to Standard Chartered. Holdings in Hong Kong, by far the biggest centre, have fallen 27 per cent.