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China reverses currency appreciation

Facing sharp fall of its export in coming quarters, Chinese government seems to reverse its course of letting Yuan appreciate against the US dollar (source: FT).

The renminbi posted a record one-day fall against the dollar on Monday as speculation mounted that the Chinese authorities might use a weaker currency to spur economic growth.

The speculation was triggered after the People’s Bank of China set an unexpectedly high central parity in the dollar/renminbi rate.

The central bank manages the currency around its central parity rate, allowing it to fluctuate by 0.5 per cent on any one day.

After closing on Friday at Rmb6.8349, the central bank set the parity rate up sharply at Rmb6.8505.

As dealing started yesterday, traders pushed the renminbi to the limit of its trading band for only the second time. The renminbi closed the session at Rmb6.8842, down 0.9 per cent from Friday’s close.

This was the renminbi’s largest one-day fall against the dollar since it was de-pegged from the US currency in July 2005, and took the currency to its weakest level since June 17.

After pressure from the US, which argued that China’s cheap currency was giving its exports an unfair advantage, China let the renminbi appreciate by 20 per cent in the three years following July 2005.

However, the renminbi has remained stable against the dollar since July this year, raising speculation that the gradual appreciation of the Chinese currency might be coming to an end.

Analysts said comments from Hu Jintao, China’s president, over the weekend had helped raise the prospect that China was moving towards a new foreign- exchange policy as the global slowdown deepened.

President Hu, speaking about the difficulties facing the economy and government, warned that Chinese competitiveness could be undermined by the current econĀ­omic downturn. He also said domestic and global economic weakness could test the grip of the ruling Communist party.

“This is clearly a reference to the fact that weak growth is likely to lead to significant social unrest,” said Steve Barrow at Standard Bank.

The renminbi also weakened in the offshore forwards market.


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