The last three trading sessions last week of the Chinese currency plummeted as much as 1,3 % against the U.S. dollar which marked its largest three-day fall in nearly three years. The same is now at 0.6 % weaker as compared against the dollar at the beginning of the year.
Although the percentage decline may seem relatively small as compared with some of the most current double-digit swings in other emerging market currencies such as the Argentina peso, moving of such level in the renminbi is particularly remarkable.
This could avertedly mean trouble for many investors following the years of significant volatility due to the managed peg against the dollar. The Renminbi has been since its humble beginnings have been subject to large and highly-leveraged positions for investors who view is as an efficient way to a single bet. A good number investors see this as an indication of a potential shift in Chinese currency policy.
These recent markets have been in a very long time attempting to spark more risk and more ambiguity that could result in the creation of more volatility. The sharp movement follows a period in which the offshore renminbi rate was seen being traded at an increasing premium to an onshore rate. This split is something attributable due to the Chinese government strict implementation on its capital account.
Investors normally take on bets on the Renminbi through Hong Kong, wherein offshore markets subsist for both non-deliverable and physical contracts for the said currency. Moreover, the Hong Kong version of the Renminbi is well known as CNH and trades without the restrictions compelling inshore by Chinese authorities.
Within the Chinese companies and investors utilised onshore rate which is severely limited by trading band on a daily basis. With each day that pass, the People’s Bank of China set a fixed rate against the dollar around which the onshore renminbi is allowed to rise or fall approximately 1 % per day.
Late last week, the CHN rate was able to reach its largest spread over CNY rate in more four years which is indicative that the international eagerness for the Renminbi had overtook that from within China itself.
A good number of currency experts agree that the widening gap may have been prodded by the PBoC into action with the last week guide of the onshore currency was relatively weaker because of higher fixes.
Others believe that the move by the PBoC to dampen the appreciation expectations is a part of its wider and longer term goal of introducing more than two-way volatility into the market. It could likewise be an attempt to bring the onshore as well as offshore rates all together before the central bank expands its daily trading band which it had long promised to do for a long time.
With weaker economic data of China may already have played its part in last week’s HSBC’s flash index report of manufacturing activity having fell to its lowest level in the span of seven months, which is a sign that the nation’s export engine is danger or stalling.
Finally, sentiments towards China has likewise been hit by expanding troubles in the country’s silhouette financial sector. Furthermore, experts are optimistic that the longer-term featured story of the Renminbi appreciation will remain relatively intact.