China props up renminbi ahead of leadership summit in March

Chinese regulators are taking measures to keep the renminbi’s dollar exchange rate stable as Beijing seeks to bolster confidence in the country’s currency and economy ahead of a key leadership summit.

The moves from authorities — such as holding off on cuts to short-term interest rates and keeping the currency’s dollar trading band firm despite the spot price pushing towards its official floor — have helped to stave off further falls for the currency, which is down 1.4 per cent this year at about Rmb7.1 to the dollar.

Those efforts come as markets look forward to potential policy signals from the “two sessions” gathering of top Communist party cadres in Beijing, set to begin on March 4 and where authorities have historically sought to minimise market volatility.

Strategists and analysts said the People’s Bank of China was focused on fending off short-term pressure from the interest rate differential between Chinese and US government debt, which has widened this year as expectations of an imminent rate cut by the US Federal Reserve have faded.

Higher yields on dollar debt relative to renminbi bonds stoked outflows from China’s bond market for much of last year, piling downward pressure on the Chinese currency.

Mansoor Mohi-uddin, chief economist at Bank of Singapore, said China’s move last week to lower its mortgage-linked five-year lending rate, while leaving the one-year rate untouched, showed that top leaders were wary of looser monetary policy, which could risk widening the interest rate differential and weakening the exchange rate further.

“They’re clearly focused on the exchange rate implications of easing monetary policy for the renminbi,” Mohi-uddin said. “What the PBoC is doing is trying to buy itself time until the Fed starts cutting rates.”

In line with analyst expectations of eventual relief from US rate cuts later in the year, forward markets tip the renminbi to end the year slightly stronger against the dollar at about Rmb7.

Ju Wang, head of greater China foreign exchange and rates strategy at BNP Paribas, said Beijing was already demonstrating a clear preference for a stable exchange rate through its daily fixing of the renminbi’s dollar trading band — around which the currency trades 2 per cent against the dollar in either direction.

“The pattern for the fixing is very stable, and by the second half the rates differential will narrow,” Wang said. “But in the second half, there is the US presidential election, and if [Donald] Trump wins . . . China would allow the currency to adjust proportionally to any tariffs.”

Trump, the Republican frontrunner, has said he could impose a 60 per cent tariff on Chinese imports if elected in November.

“That’s essentially saying we’re at the end of the era of normal trade between the US and China,” Wang said, forecasting that the renminbi would drop by at least 10 per cent from its current level to about Rmb8 against the dollar.

Economists at Capital Economics have forecast an even sharper fall against the dollar of about 18 per cent to Rmb8.5 if Trump follows through on his tariffs threat.

“Donald Trump’s previous tariffs did surprisingly little damage to China’s economy,” they wrote in a recent note, “but China may find it harder to shrug off the damage in a rematch.”