Beijing moves to stop yuan appreciation

Peoples-Bank-of-ChinaThe Chinese central bank has indicated it wants to limit the appreciation of the renminbi but has held back from decisive action. The People's Bank of China lowered the reserve requirement on renminbi FX derivatives from 20% to zero on Monday, reversing a policy initiated to prevent the currency depreciating. “We see the reversal in the reserve requirement being partly a return to normality and partly a signal that Beijing does not want to see one-way expectations in the market flipping from depreciation to appreciation,” said Aidan Yao, senior emerging Asia economist at Axa Investment Managers. However, Yao argues the strengthening of the renminbi, in dollar terms, is caused by powerful macroeconomic forces and will not stop unless Chinese policy makers take more drastic measures. These could include selling renminbi while accumulating foreign reserves, tinkering with the FX fixing mechanism or, “the nuclear option”, removing controls on outbound investment. The last choice would be difficult to manage, he admits, and may have unforeseen consequences. “Given the unknown risks, we think exercising it before the Party Congress is unlikely,” said Yao. ©2017 funds global asia

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