CHINA CLEARS WAY FOR FURTHER RENMINBI WEAKENING / THE FINANCIAL TIMES

China clears way for further renminbi weakening

By Roger Blitz

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©Bloomberg

China has paved the way for a further weakening of its currency by announcing changes in how it measures the renminbi’s value.

The move, announced on Friday, has raised investors’ alarm at the prospect of a new currency war — just as the US prepares to raise interest rates.

As markets gear up for next week’s Federal Reserve meeting, the People’s Bank of China signalled it would measure the level of the renminbi (or yuan) against a basket of currencies rather than just the US dollar.

Adopting such a basket would make it easier for the PBoC to guide the RMB lower against the dollar, according to Stuart Oakley, head of emerging markets at Nomura.

“By showing that the yuan has actually appreciated against a trade-weighted basket of currencies, it will be very hard for the US authorities to criticise Chinese policymakers for allowing the yuan to weaken against the dollar,” he said.

The move was transmitted in an article posted on the central bank’s website late on Friday, and comes at the end of a week when the RMB’s value has steadily declined against the greenback.

Investors are nervous about the pace and size of weakening in the value of the RMB, after the unexpected devaluation of the currency in August triggered a shock market sell-off, prompting the Fed to postpone its rate rise plans.

 

The offshore yuan has dropped 1.3 per cent over the week, driven by a sharp fall in China’s foreign exchange reserves and the PBoC relaxing the reference rate that sets the trading band for the onshore currency to its lowest level in four years.

 

The PBoC had acted to steady the currency and had focused on a campaign to win reserve currency status from the International Monetary Fund, which it achieved last week.

 

But with the Chinese economy coming under strain, the strength of the currency hurts its competitiveness. Combined with fears that a stronger dollar would lead to greater capital outflows from China, analysts have been expecting the PBoC to conjure up a gradual weakening of the RMB.

Stephen Jen, of the hedge fund SLJ Macro Partners, said: “Announcing a basket peg or a basket reference could also absolve them of the guilt of conducting competitive devaluation.”
 

But if the move prompted a similar market reaction to the currency’s 3.3 per cent fall over three days in August , “we all know what the Fed will do next week: delay yet again what they should have done a year ago”, added Mr Jen.

Others pointed out that the PBoC had first announced the move a decade ago, but had not put it into practice.

Eswar Prasad, professor of economics at Cornell University, New York, and a former China mission chief for the International Monetary Fund, said managing the RMB against a basket of currencies rather than just the dollar would smooth the transition to a flexible exchange rate.

As the economies and monetary policies of the US and the rest of the world diverge, the rationale for managing the renminbi’s value solely against the dollar had become “increasingly tenuous”, he said.

Earlier this year, the IMF suggested that moving to a broader basket of currencies could be a good interim step on the way to a full liberalisation of the RMB.


Additional reporting by Shawn Donnan