By now, we’re used to weird stuff happening in the Chinese economy, but this week has been particularly strange. Not only has the renminbi fallen by 0.9% against the dollar to a 10-month low, its biggest drop since 2005 when it was un-pegged against the dollar, but it sounds like the People’s Bank of China is actually driving it.
In 2012 the PBoC vowed to make the yuan more volatile – as likely to fall as it is to rise, after which the currency promptly spent 18 months rising by about 5% against the dollar. Over the past nine days, though, it’s dropped by 1.5% to 6.16 against the US dollar and signs – such as a 10% increase in trading volume between the renminbi and the Hong Kong dollar – suggest the PBoC is behind it.
As Jian Chang, an analyst at Barclays, wrote in a note today: ‘FX sales data released this week point to continued strong capital inflows in January, and there are no signs of large capital outflows or sharp deterioration in fundamentals… This supports the view that the recent… devaluation was mostly guided by the PBoC.’
Why would the government do this? Well, it’s partly because it wants speculators (who have, for months, been betting on the currency continuing to rise) to be more cautious, and partly because China is so dependent on exports, it can’t afford for its currency to get too strong. Perhaps the strongest motivation is to do something about the mysterious 'shadow' financial system in China. The commonest example of which is the illegal cross-border carry trade: obtaining money abroad at a low interest rate, turning it into renminbi, then lending it inside China at a much higher rate.
Analysts don’t seem overly concerned: ‘We do not think the current bout of renminbi weakness should be considered "out of control",’ HSBC analysts told the FT. It’ll be interesting to see how far this can go before they do start to worry.
Here's what the dollar has been doing against the yuan over the past few weeks: