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China seeks to support its currency after the renminbi reached its lowest level in 16 years

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China’s central bank has set the renminbi’s trading range against the dollar at an unexpectedly high level, expanding its efforts to hedge bets against the currency as it falls to lows not seen since the 2007-2008 financial crisis.

Foreign exchange strategists and economists said the move reflected growing alarm over renminbi weakness among senior officials, who welcome the export boost provided by the softer currency but remain wary of capital outflows that could be fueled by a runaway depreciation of the dollar against the dollar. Dollar rise.

Despite the move by the People’s Bank of China, the renminbi fell 0.2 percent in early trading on Friday to 7.3417 renminbi per dollar, sending the currency down about 6 percent this year to a new low in 16 years.

Monetary easing to boost the economy has pushed interest rates on Chinese government bonds lower than those on US Treasuries, and has already led to more than $20 billion in foreign inflows from the country’s internal debt market this year. This has added downward pressure on the exchange rate.

“It’s a very dynamic dance,” said Hui Shan, chief China economist at Goldman Sachs. She said that since slow economic growth meant there was no option to raise interest rates to match those in the United States, the central bank aimed primarily at managing currency depreciation. Most investors are still expecting [the renminbi] It will continue to decline.”

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The PBOC’s recent efforts to support the renminbi have focused on its daily fixation of the midpoint of the currency’s trading range, around which the renminbi can trade 2% in either direction against the dollar. On Friday, the People’s Bank of China set the benchmark interest rate at 7.215 RMB per dollar, about RMB 0.11 stronger than the expectations of analysts polled by Bloomberg.

A vertical chart of the difference between the daily midpoint of the trading range and the market forecast (Rmb/$) showing that the People's Bank of China uses

The stronger-than-expected reform came after data on Thursday showed the fourth straight month of contraction in exports and pushed the currency below its lowest level last October, when cities across the country were forced into lockdown to contain the coronavirus outbreak.

“You can see why the renminbi has fallen to new lows because the dollar is strong across the board and the People’s Bank of China (PBoC) [to support the renminbi] “Inflation is still limited,” said Mansour Muhyiddin, chief economist at the Bank of Singapore.

“The central bank will continue to try to use the reform to prevent a more debilitating decline in the exchange rate, which would worsen sentiment towards China and lead to more capital outflows and further declines,” he added. “They don’t want to get into that vicious circle.”

But the People’s Bank of China is still under pressure to increase stimulus and boost growth. The next key economic reading on Saturday will come from the official consumer price index for August, which economists polled by Reuters had expected to rise just 0.2 percent from a year ago.

Foreign exchange strategists said that unless Beijing launches major fiscal stimulus or the dollar’s appreciation begins to fade, there is not much chance for the Chinese currency to turn around.

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“Now that we’re past those lows from last year, it looks like there’s more to go, and the key is that the perception outside of China is that Chinese investors are looking for exits,” said Sean Callow, chief currency strategist at Bank of America. Westpac.

He said the bank “recommends short selling [against the renminbi] Now, although a large part of that is due to the strength of the dollar, there is also very little evidence of a change in sentiment towards the renminbi in the markets.

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