Gap between renminbi rates widens to record

The gap between the renminbi’s two exchange rates has widened to a record, fuelling speculation that Beijing intends to allow its currency to depreciate at a faster rate than previously seen.

The spread between the offshore market and the more tightly controlled onshore market is an embarrassment for the People’s Bank of China, which pledged in August to narrow the gap as part of its efforts to make its currency “freely usable”.

Investors around the world are worried that an unexpectedly fast depreciation will destabilise China’s economy. Some also fear it could trigger a wave of competitive devaluations across the region.

“During our investor meetings in December, the most significant risk that investors were worried about was a substantial devaluation of the renminbi,” wrote Timothy Moe, Goldman Sachs’ chief Asia-Pacific equity strategist, in a research note on Wednesday.

The offshore renminbi fell to Rmb6.72 against the dollar as London traders took over from Beijing. It has now dropped more than 2 per cent this week in its steepest move since mid-August, when the PBoC shocked global markets with a surprise devaluation.

Meanwhile the onshore rate, which can trade 2 per cent either side of a midpoint fixed by the central bank each day, ended the official Beijing trading day at Rmb6.55.

“It feels like the PBoC wants to keep the market on its toes,” said Mitul Kotecha, head of Asia currency and rates strategy at Barclays. “Ultimately, I don’t think it will be allowed to become a one-way bet and the unexpected volatility in the fixings could be one way of doing that.”

Since August when the PBoC said it would allow “market forces” to have a greater say in directing the onshore market, analysts and investors have been debating what that means in practice — and the pace of change that Beijing will permit.

On Wednesday, for example, the PBoC fixed the midpoint at Rmb6.5314, which was significantly weaker than the Rmb6.5198 rate implied by the previous day’s close. The fix is set at 9.15am and trading begins at 9.30am. Traders have been increasingly using the 4.30pm rate of the previous day as a guide to where the next midpoint would be fixed.

“The sudden movement of the dollar-renminbi fixing rate will definitely create more market volatility,” said Zhou Hao, strategist at Commerzbank. “In general, we think that the Chinese authorities will tolerate more weakness in the renminbi for the time being.”

The August changes were designed to act as a sort of halfway house for the renminbi on its path to becoming a freely-floating currency. But pressure for faster depreciation has risen in response to a slowing Chinese economy and capital outflows as companies and investors seek more stable or appreciating currencies.

Also in August, the PBoC was pushing for the International Monetary Fund to grant the currency reserve status — and its changed regime was mostly aimed at meeting those criteria.

It won reserve status in late November, but the widening gap between the onshore and offshore rates is an embarrassment for China since it suggests the renminbi is in fact not “freely usable” as the IMF requires.