China fires a “shot across the bow” in an attempt to halt the rise of its currency.
China’s policy makers fired a “shot across the bow” of currency markets this week in a bid to slow the rise of its currency. The move might work in the short term, but fundamentals are likely to favor a stronger renminbi over the long run, analysts said.
As a result, local banks will be forced to purchase and hold more foreign exchange on their balance sheets, The change in policy should put pressure on the renminbi in the short term and act as a “temporary roadblock for further renminbi strength,” said Brendan McKenna, international economist at Wells Fargo, in a Wednesday note.COVID-19 cases have been contained, allowing China’s economy to operate at full capacity and for nationwide mobility to return to pre-pandemic levels, McKenna said.
“In the current low-rate environment, investors are in ‘search for yield’ mode,” McKenna wrote. “With local currency debt in China offering attractive yield dynamics, foreign investors have been quick to deploy capital to Chinese sovereign debt, which has also provided support to the renminbi over the past year.”
“So the problem for the yuan is not that it is appreciating overall, but rather that the dollar has depreciated about 11% against its trade-weighted basket over the last year,” Weinberg noted. “The yuan is up only 0.8% year-over-year against the euro EURCNY, +0.03%, for instance.” Weinberg isn’t convinced that official China is all that worked up about a stronger currency versus the dollar.
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