The timing of China’s twin easing measures, announced late on Tuesday, appeared to chime with the view that Beijing had blinked in the face of tumbling stocks. Earlier in the day, the Shanghai Composite had dropped 7.6 per cent, marking its steepest two-day slide in almost 20 years.

However, some analysts are pointing the finger instead at the renminbi, and the mounting costs of supporting the Chinese currency following this month’s devaluation.

China stunned global markets on August 11 when it announced a 1.9 per cent cut to the daily fixing rate around which it allows the renminbi to trade against the US dollar, the largest drop on record.

Further cuts came on the following two days, raising fears that Beijing was embarking on a competitive devaluation to boost exports in the face of slowing economic growth. In the space of just three days, the renminbi weakened by 3.8 per cent to its lowest since mid-2011.

Since then, the renminbi has been roughly flat against the dollar, even as other emerging market currencies have fallen sharply. Many analysts attribute the steadier exchange rate to intervention by the People’s Bank of China.

But selling US dollars to buy renminbi has become an increasingly costly endeavour for Beijing, in terms both of ebbing foreign exchange reserves — albeit still by far the world’s largest — and renminbi liquidity within China.

“The battle to stabilise the currency has had a significant tightening effect on domestic liquidity conditions,” said Wei Yao, economist at Société Générale, in a note. “The PBoC’s war chest is sizeable no doubt, but not unlimited. It is not a good idea to keep at this battle of currency stabilisation for too long.”

The French bank is among those that now expect the renminbi to fall to Rmb6.8 by the end of this year, a 6.2 per cent depreciation from its current level of Rmb6.4.

The Chinese currency has come under increasing pressure as capital leaves the country at a rapid pace and the economy slows. In July the equivalent of $41bn left China, a monthly record.

Some analysts believe this week’s reductions to interest rates and reserve requirement ratios (RRR) were designed to offset the effects of capital outflows and Beijing’s attempts to underpin the renminbi, rather than simply to boost share prices.

“We do not think stock market is a major factor behind the monetary easing,” wrote JPMorgan economists. “The liquidity injection via [the] RRR cut is mainly to offset the decline in interbank liquidity, which is related to recent capital outflows and FX intervention.”

Meanwhile, expectations of further renminbi weakness are fast becoming entrenched, despite clear statements from both the PBoC, and more recently Chinese Premier Li Keqiang, that there is “ no basis” for continued depreciation.

“After [the] recent FX regime shift, it’s also not realistic to assume the renminbi should stabilise after mere 3 per cent depreciation,” said analysts at Citigroup. The futures market is already pricing the renminbi at 6.73 a year from now, compared with 6.60 a week ago.

As capital flows out, the PBoC will at least have a freer hand to cut interest rates and RRRs further in an effort to boost the economy, without fuelling inflation. Miranda Carr, analyst at BESI Research, expects the RRR to fall by another 10 percentage points over the coming two years.

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