Date
16 December 2017
Renminbi has fallen to its weakest level in more than six months due to external factors as well as some domestic policy speculation. Photo: Bloomberg
Renminbi has fallen to its weakest level in more than six months due to external factors as well as some domestic policy speculation. Photo: Bloomberg

Renminbi slide: What are the reasons?

Following sharp declines last Friday and this Monday, the renminbi has hit the lowest level since June 2014. There are four short-term factors that caused the slide of the currency, according to Liu Hong, an economist from Bank of China.

The first is the appreciation of the US dollar.

The euro was pressured by a larger-than-expected quantitative easing program from the European Central Bank, and also the victory of the left-wing party Syriza in Greek elections last Sunday.

The steep fall of the euro pumped up the US dollar on the other side, causing the dollar index to rise above 95 points.

The Chinese currency’s weakness also reflects widespread expectations that the People’s Bank of China (PBoC) will slash interest rates and cut the reserve requirement ratio (RRR) for commercial banks amid the economic slowdown, Liu noted.

Though the central bank may not ease right away on concern that lower rates may further push more funds into the stock market and lead to excessive speculation, it is seen just a matter of time before it will take some action.

Unwinding of carry-trade is another factor behind the fall of the renminbi.

It is believed that some institutional investors and hedge funds had borrowed Japanese yen at a cost of less than 0.25 percent to buy higher-return renminbi investment products to pocket a yield difference of as high as three percentage points.

However, the recent drop of the Chinese currency is posing a risk to such carry-trades, and investors are therefore closing the positions. Related sales of renminbi pushed down the currency.

Finally, the PBoC is showing greater tolerance for renminbi fluctuation. That also explains why the currency is deviating more from the central rate.

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RC

EJ Insight writer

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