The renminbi, which the People’s Bank of China allows to trade in a band of plus or minus 0.5% about a daily fixing rate, has seen a sharp slowdown of appreciation against the dollar in recent weeks as worries over China’s economy have risen.
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| Source: Deutsche Bank Autobahn |
Chinese activity data has shown a marked deterioration, with the country’s commerce ministry saying that the increase in domestic inflation and weak demand abroad were at risk of severely straining its export potential. Indeed, figures last week showed Chinese manufacturing PMI slipped below the boom/bust 50 level in November, dropping to 49 from 50.4 in October.
That triggered a move from the PBoC last week to lower commercial banks’ reserve requirements, the first easing of monetary policy in three years and a signal that Beijing had move from fighting inflation to boosting growth.
The gloomy news continued on Wednesday as China’s vice commerce minister said the country’s export growth had slowed in November versus October, when it was already at its lowest level in nine months.
Speculation has grown that China, just as it did during the financial crisis following the collapse of Lehman Brothers, has effectively halted the gradual appreciation of the renminbi against the dollar in order to protect its export sector from the current slowdown.
Some even speculate that China has been forced to prop up the renminbi in recent sessions as it has hit the bottom of its trading band against the dollar as fear over the country’s exposure to the eurozone, its largest trading partner, have risen.
Reserve data would appear to support this theory, with the PBoC’s FX stockpiles, the world’s largest, declining for the first time in four years in October.
Morgan Stanley puts the fall in reserves, which occurred despite the country’s trade surplus, down to an outflow of speculative funds from China, with hot money no longer betting on continued appreciation of the renminbi.
The resulting effect of declining Chinese FX reserve should put pressure on EURUSD as Beijing has less need to go out into the market and buy euros in order to rebalance the ratio of different currencies within its portfolio.
Hans Redeker, head of global FX strategy at Morgan Stanley, said the effect had not yet influenced action on FX markets, with price action driven by the attempts by European policymakers to get to grips with the sovereign debt crisis.
“While this factor is long-term dollar-positive, we note that reserve reallocation did not affect FX markets over the past couple of weeks,” said Redeker.
“Over past weeks, it has been the developments in EMU driving markets. This driving force will remain in place, we think.”
If efforts by European policymakers do convince investors that the euro can survive, it may be that the single currency will have lost a major pillar of support from China.