China steps up measures to cool renminbi’s rally

China is resorting to measures not used since the global financial crisis to ease the appreciation of its currency as the country grapples with soaring global commodity prices and slowing economic growth.

The move by the People’s Bank of China that will force lenders to hold more foreign currency indicates that policy makers want to rein in the renminbi’s gains after it touched down. strongest level Against the dollar in three years last week. It was a reversal of the years of the Trump administration, which described Beijing as currency manipulator In 2019 after the weakening of the renminbi after the important level of 7 renminbi to the dollar.

The central bank’s measure, announced late Monday, will raise the required reserves of China’s financial institutions from 5 to 7 percent of total foreign exchange deposits “in order to strengthen foreign exchange liquidity management,” according to the People’s Bank of China.

Analysts said this represented the largest increase of its kind ever and the first since the global financial crisis. The strength of the renminbi has created more headaches for policymakers in China who are already grappling with soaring commodity prices and the risks of large amounts of leverage across the economy.

China’s currency has strengthened nearly 11 percent against the dollar over the past 12 months. The internally traded renminbi was little changed at 6.3696 per dollar on Tuesday, but analysts said further intervention in the currency markets is a possibility.

The move aims to calm the rapid appreciation of the renminbi on land through devaluation [foreign currency] “Liquidity is in the system,” said Becki Liu, a macroeconomic analyst for China at Standard Chartered, who estimated that the increase would squeeze about $20 billion of liquidity from the country’s foreign exchange market.

This requirement will constrain the domestic supply of foreign exchange, making it difficult to use dollars to purchase the renminbi internally, which could dampen demand for the Chinese currency.

The work of the People’s Bank of China (PBoC) has highlighted its stance against the rapid appreciation of the renminbi and hints [at] “More actions to come,” said Ken Cheung, chief Asian currency strategist at Mizuho Bank.

However, some policymakers in China have argued in favor of a stronger renminbi. This month, a People’s Bank of China (PBoC) official wrote an editorial, later deleted, arguing that the central bank should allow the currency to rise to counteract Global commodity prices rise. A stronger Chinese currency could make its imports of raw materials abroad cheaper.

Top Goods’ prices It raised factory gate prices in China and fueled inflation fears. A cabinet meeting chaired by Premier Li Keqiang said last month that measures should be taken to stem producer price inflation, which rose by 6.8 percent in April, passing through consumer price inflation, which remains low. Producer prices fell throughout most of 2020.

There are also signs that China’s robust economic recovery from Covid-19 is easing. On a quarterly basis, the economy Expanded only 0.6 per centt in the first three months of the year, according to the National Bureau of Statistics, significantly lower than expectations.

China’s exports, which in theory benefit from the weakening of the renminbi, have boomed over the past year despite the strengthening of the currency. Exports rose 32 percent year-on-year in dollar terms in April, reflecting China’s dominance of global trade given its rapid recovery from the pandemic.

However, “the broad strength of the renminbi is likely to undermine the competitiveness of China’s export sector,” Cheung added.

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