Top Chinese bankers in London are warning of the drama that would follow any US attempt to weaken the dollar by intervening in renminbi markets — a move that would be seen by Beijing as a “political act”.
The risks of such action have heightened since June, said analysts, after US president Donald Trump repeatedly took aim at China and Europe for “playing currency games” as trade wars threatened to spill over into foreign exchange markets.
The US Treasury officially branded China a currency manipulator this month after the Chinese central bank allowed the renminbi to fall below Rmb7 to the dollar, a key threshold last breached in 2008, leading to further escalation in trade tensions. On Thursday the renminbi was trading at a fresh low of 7.0749.
But despite a lull in tit-for-tat tariffs and a delay to some additional levies on Chinese imports to the US, the warnings are the latest signal that markets are taking the currency threat seriously. One senior staffer at a London-based Chinese bank said the US could conceivably intervene in the offshore renminbi market, where the currency is traded more freely than on the mainland. But the consequences could be serious.
“If you take on China on the currency . . . it would be interpreted as a political act and it would throw markets into turmoil,” said the senior staffer, speaking on condition of anonymity. The political fallout would be “unprecedented”, the person added.
Despite the US Federal Reserve cutting rates in July, and president Trump urging the central bank to take more radical action, the dollar is showing few signs of weakening. By one key measure, the trade-weighted dollar punched through a record high last week, according to the St Louis Fed.
“We are getting closer to terms where intervention is possible,” said Eric Stein, Boston-based co-director of global income and portfolio manager at Eaton Vance, which manages $474bn of assets.
The list of possible targets for US intervention is broad, said Bank of America Merrill Lynch strategist Ben Randol, and includes the euro, Japan’s yen, the Chinese renminbi and the Mexican peso.
But some believe Washington’s focus would be on China. “If an intervention does go ahead, I think the US would probably target specific currencies such as the renminbi, rather than attempt to achieve broad-based dollar weakness,” said Steven Oh, global head of credit and fixed income at PineBridge Investments, which manages $97bn of assets.
Daily average volumes in the offshore renminbi market amount to around $200bn, according to the Bank for International Settlements’ last survey of currency markets. The US could deploy some $146bn if intervention became an option, according to BofAML estimates, by combining the Treasury’s Exchange Stabilization Fund and the central bank’s firepower.
Jon Vollemaere, chief executive of R5FX, a trading platform focused on emerging markets, said such a move could have an immediate impact on prices.
“The Fed could just buy up all the offshore renminbi. It’s so illiquid that [they] could drive prices [higher] easily,” he said.
The political impact would be broad. A unilateral move by the US would likely inflame not just policymakers in Beijing but in Europe too, as Washington could be deemed to be in breach of the commitment among G20 nations to avoid competitive devaluations.
The People’s Bank of China would also likely move swiftly to counter any US-led buying of the renminbi. But implementing restrictions on the offshore currency would be costly for Beijing, too. “It would be a massive . . . loss of face for China if they were forced to impose capital controls,” Mr Vollemaere added.
Last month US Treasury secretary Steven Mnuchin said there was no change “as of now” to America’s currency policy but added that a different stance could be considered in the future.
Morgan Stanley analysts said this week that the market may be “underestimating the ease with which the US can intervene unilaterally”.
But some investors have grown more cautious. One head of a currency trading platform that serves US hedge funds said clients have begun to stay away. “They don’t want to be on the wrong side of the Fed,” he said.
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