Economic optimism buoys China’s renminbi

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The renminbi has risen to its highest level against the US dollar in almost six months, as investors look past lingering concerns about the state of the Chinese economy.

A small rise on Thursday took the Chinese currency to 6.138 against the dollar, its strongest since March 10.

Having fallen for much of this year, the Chinese currency is experiencing something of a summer revival, gaining almost 2 per cent from its May lows. Over the past three months it is neck-and-neck with the Thai baht for the best performer in Asia.

Confidence in the renminbi has been boosted by China’s strong trade performance. In July, the country posted a fresh record monthly surplus of $47.3bn on the back of soaring exports.

China’s other recent economic data have been more mixed, although two gauges of activity in the services sector earlier this week showed clear signs of improvement.

“Markets are less concerned about economic conditions than they were going into June,” said Mitul Kotecha, strategist at Barclays, which has led to a “more bullish tone” on the currency.

With volatility on global markets still low, the renminbi also remains an attractive option for those seeking a carry trade, added Mr Kotecha, making it “an easy trade to get back into”.

Analysts also say that the People’s Bank of China has stepped back from its policy of heavy-handed intervention, which many believe was behind an unexpected bout of currency weakness earlier this year.

Following years of steady appreciation, many investors and companies had come to see the renminbi as a one-way bet – a perception that Beijing has been keen to challenge.

The central bank has the ability to nudge the renminbi up and down using its daily fixing point – around which the currency can rise or fall by a maximum of 2 per cent. Starting in February, the PBoC went on a run of setting weaker fixes, helping to alter market views of guaranteed appreciation.

Between mid-February and late May, the renminbi dropped 3.8 per cent in offshore markets, wiping out more than a year of gains. Many currency strategists responded by cutting their forecasts for future appreciation.

The renminbi remains the worst performing currency in Asia for the year so far, down 1.3 per cent against the dollar. Only two other currencies in the region – the Vietnamese dong and the Taiwanese dollar – have weakened this year, both by smaller margins.

In spite of the renminbi’s recent rebound, many analysts remain cautious about the prospect of significant further gains.

“In our view, overall economic policy considerations do not suggest very rapid appreciation ahead,” wrote Louis Kuijs, economist at RBS, in a recent note to clients. “We think the PBoC would not want to waste the progress made recently in shaking off expectations of a gradual appreciation.”

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