China is resorting to measures that have not been used since the global financial crisis to soften the rally in its currency, as the country struggles with rising commodity prices and slowing growth, analysts predict.
A move by the People’s People’s Bank of China to force lenders to hold more foreign exchange shows that policymakers want to curb the renminbi’s profits. the strongest level against the dollar last week for three years. It means a turning point in Trump’s years, which was labeled in Beijing: a currency manipulator In 2019, after the renminbi weakened in the past to the level of Rmb7 per dollar.
As a result of the central bank’s announcement late Monday, the required reserves of Chinese financial institutions will be increased by 5 to 7 percent of total foreign currency deposits “to strengthen foreign exchange liquidity management,” according to the PBoC.
This marks the largest such increase ever, analysts say, the first since the global financial crisis. The strength of the renminbi has further created a headache for policymakers in China, who are already facing rising risks of rising commodity prices and major leverage in the economy.
Over the past 12 months, the Chinese currency has strengthened against the dollar by almost 11%. Trading renminbi traded slightly higher at $ Rmb6.3696 on Tuesday, but analysts said more foreign exchange was likely to intervene.
“This move is aimed at reducing the rapid assessment of land renminbi by reducing it [foreign currency] liquidity in the system, “said Becky Lu, a Chinese macroeconomist at Standard Chartered, who said the increase would weaken the country’s foreign exchange market by about $ 20 billion.
Demand will restrict the domestic supply of foreign currency, making it difficult to use the dollar to acquire the renminbi shoreline, which could ease demand for Chinese currency.
“PBoC’s action strengthened its stance against renminbi’s rapid assessment և hints [at] The next steps are to be taken, “said Ken Cheung, chief financial officer of Mizuho Bank.
However, some policymakers in China have argued in favor of a stronger renminbi. This month, a PBoC official wrote an editorial that was later deleted, arguing that the central bank should allow the currency to appreciate. Rising world commodity prices“Stronger Chinese currency can make imports of foreign raw materials cheaper.”
The highest Commodity prices In China, factory gate prices have risen, raising fears of inflation. At a government meeting chaired by Prime Minister Li Keqiang last month, it was said that measures should be taken to curb rising inflation, which rose 6.8 percent in April to lower consumer prices. Producer prices have declined for most of 2020.
There are signs that China’s strong economic recovery from Covid-19 is freezing. Quarterly economy only 0.6 per cent expandedAccording to the National Bureau of Statistics, the first three months of the year are much lower than expected.
China’s exports, which theoretically benefit from weak renminbi, have risen over the past year, despite the strengthening currency. Exports rose by 32% year-on-year in dollar terms in April, reflecting China’s dominance in world trade, given its rapid recovery from the epidemic.
However, “the broad strength of the renminbi is likely to undermine the competitiveness of China’s export sector,” Chung added.