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August 10, 2016 1:50 am
Renminbi shock a distant memory for currency markets
Jennifer Hughes in Hong Kong and Yuan Yang in Beijing
This time last year, the biggest early-day news about the renminbi appeared to be an announcement of a new, improved Rmb100 note to fight counterfeiting. It was until China’s central bank fixed the currency 1.9 per cent weaker than it had the previous day.
Traders were so stunned they initially thought there was something wrong with their hearing.
That change in the daily fix, around which the onshore renminbi trades 2 per cent either side, was five times the size of any fix move by the People’s Bank of China before then, and is still twice the size of any change since the turmoil it triggered.
One year on, the renminbi market is more or less calm once more as those speculating on further falls have either given up or found more profitable bets elsewhere.
But that would not be the case without the events of last August, which forced the PBoC to communicate better, and taught many investors that alongside the old maxim “don’t fight the Fed” they should perhaps add another: “don’t push the PBoC”.
“The motive [for currency reform] was right but they fumbled the process [last August], and they’ve learnt a lot since,” says David Mahon, chairman of Mahon Beijing Investment Management Advisors. “Western observers make too much of what they see as currency manipulation. This [suspicion] comes from a lack of understanding of the Chinese economy.”
The PBoC’s increased willingness to communicate is the biggest change. On August 11th, the momentous fixing was accompanied by a very brief statement that talked only of a “one-time adjustment” and a shift — with no details — to a market-focused regime.
That limited information prompted fears the depreciation was really a sign China’s economy was in far worse state than realised and that the PBoC’s control over capital flows could be cracking.
They also worried that China was opening a new front in the currency wars, seeking competitive devaluation to bolster its exports.
“The market impact was clearly underestimated by policymakers,” says Mansoor Mohi-uddin, senior markets strategist at RBS. “They’ve had to change a lot since then.”
Communications have developed in several steps. In December the PBoC began publishing the composition of the basket of currencies against which it tracks the renminbi. Analysts have since mostly concluded that the central bank does follow market pricing in setting the renminbi fix — at least, to a far greater degree than before, and so long as it suits it to.
Talking publicly was a bigger ask: except for a brief appearance in September, Zhou Xiaochuan, the PBoC governor, only broke silence in February, in a magazine interview. That only came following heavy criticism of January’s tumbling renminbi that in turn produced fresh global turmoil.
“PBoC officials have stepped up their communication game,” says Frederic Neumann, head of Asian economic research at HSBC. “They [have] let investors understand that [currency reform] is about flexibility, not an opening shot in the global currency wars.”
The central bank has also demonstrated it is prepared to play hard ball. In January, heavy intervention in the offshore market hurt short-sellers and stemmed the renminbi’s fall. Meanwhile, new reserve requirements, imposed on offshore deposits for the first time, sent short-term renminbi borrowing rates in Hong Kong negative for a day by the end of March. The result was the renminbi ended the quarter stronger.
Bearish bets now appear to have been rethought to the extent that last month, when the renminbi slipped to five-year lows, it was not met with anything like the same fevered reaction as last August.
The PBoC’s actions have also made it clear that China maintains a strong grip on its capital account.
After its FX reserves fell by more than $100bn in both December and January, bolstering the case for renminbi bears, subsequent outflows slowed sharply amid reports China was tightening its controls in several ways.
Some of these enforced existing rules. While approval had always been needed from the State Administration of Foreign Exchange for big overseas acquisitions, there was now a sense that “you really had to have a deal worth prioritising above other outbound investments”, according to one source.
New measures have also been brought in: from February, the PBoC started capping the transactions of mainlanders buying life insurance in Hong Kong to stop them from exploiting a loophole to move funds offshore.
SAFE stopped allocating quotas allowing domestic investors to invest abroad, and stopped its launch of the second Qualified Domestic Institutional Investor scheme that allows domestic investors to buy equity abroad.
Officials also began encouraging big banks and would-be acquirers of foreign companies to borrow in dollars to create cash pools offshore rather than move existing renminbi.
The final reason for the lack of recent upsets may simply be that other crises have emerged elsewhere.
“People have become distracted: global events such as Brexit have meant there’s less attention and scrutiny of the PBoC’s management of the renminbi,” says Mr Mahon.
In spite of its improved communications and market-focused currency management, that is something the PBoC is likely to welcome.
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