The renminbi appreciated beyond Rmb6.5 to the US dollar for the first time in 16 months, fuelling expectations of the currency’s continued strength in the run-up to the Chinese Communist party congress next month.
The onshore renminbi firmed as much as 0.5 per cent to Rmb6.4900 per dollar on Thursday, the strongest level against the US currency since May 2016, as Beijing’s determination to temper capital outflows is seen relieving pressure on the exchange rate.
It means China’s currency has risen 6.6 per cent since the start of the year, cancelling out last year’s fall against the dollar when it was plagued by worries that the authorities were struggling to contain its depreciation.
The move appeared to be mainly driven by broad weakness in the dollar. The index that measures the dollar against a basket of peers was down 0.5 per cent to 91.852, near its lowest since January 2015.
The offshore exchange rate for the renminbi, which is not bound by the onshore rate’s trading band set by the country’s central bank, advanced as much as 0.6 per cent to Rmb6.4975.
Strength in the renminbi is also mirrored in the stability of China’s foreign exchange reserves, which rose again in August for the seventh consecutive month, now standing at $3.092tn.
Mansoor Mohi-uddin, senior market strategist at NatWest Markets, said options for the People’s Bank of China to arrest the dollar-renminbi decline “appear to be constrained” ahead of the party congress, a five-yearly meeting of China’s leadership which starts on October 18.
“If senior officials at the central bank were to verbally intervene and foreign countries responded adversely, the exchange rate would become a very inconvenient issue at a critical time for China’s political leadership,” he said.
Any reversal in the dollar-renminbi exchange rate may be unsustainable, Mr Mohi-uddin suggested, because corporates were still trying to sell dollars, having accumulated foreign exchange at the start of 2017.
The renminbi also gained last Friday after the PBoC set the currency’s trading band firmer, while the latest reading of China’s manufacturing sector came in better than expected.
The onshore rate inched higher against the dollar in the first half of the year, but the pace increased in July and August. Marc Chandler at Brown Brothers Harriman described August as the renminbi’s “best month in many years”, noting that as China’s reserves had increased, “so too has its appetite for US Treasuries”.
According to Société Générale, the clampdown by Chinese authorities on capital outflows and the reduction in market concerns about China’s economic growth “have undoubtedly contributed to the renminbi’s bounce this year”.
Currency analysts have been monitoring the steady appreciation of the renminbi in recent weeks. Simon Derrick of BNY Mellon noted that the dollar has fallen further against the renminbi than the yen in the past month.
The renminbi was “starting to behave almost as if it were a free floating currency”, Mr Derrick said.
For the broader forex market, that could mean a reduction in demand for alternative reserve currencies such as the euro, the Canadian dollar and the Australian dollar, he suggested.
“ . . . the moves seen in the CNY could be the first very small signal of a real shift in market dynamics,” Mr Derrick wrote.
Citigroup cautioned investors not to assume continued renminbi strength, however. Economic fundamentals do not warrant an excessively strong renminbi, its analysts said, one-way appreciation was not the intention of policymakers, and the PBoC had plenty of ways to weaken the currency.
“Overall, we think one-way RMB appreciation would face correction pressure, either induced by policy actions or driven by the market,” said Citi.