Date
17 October 2017
The PBOC doesn't want the RMB to weaken too much. Photo: Reuters
The PBOC doesn't want the RMB to weaken too much. Photo: Reuters

China brings back floor for RMB to stem outflows

The People’s Bank of China is using its official guidance rate to put a floor under the renminbi, Reuters reported.

The move suggests Beijing is worried enough about growing capital outflows to resume intervention in the foreign exchange market.

The move is a step backward from Beijing’s promises to intervene less in the market, but the central bank has few options.

Letting the RMB, also known as the yuan, slide sharply would only accelerate capital outflows, which would put upward pressure on interest rates. However, the PBOC wants to make money cheaper to stimulate the economy and ease huge debt loads at many Chinese firms.

“Liquidity in the onshore market is okay so far, but if the central bank continues to lean against the market forces, transaction volumes could be affected,” said Wang Ju, senior Asian forex strategist at HSBC in Hong Kong.

The PBOC’s strategy is clear from the way it sets its official midpoint rate, a fixed exchange rate set every morning from which the exchange rate can rise or fall in trading by 2 percent.

When the midpoint is set in a way that expresses median market consensus, the RMB will have a 4 percent range across which it can trade all day.

But if the midpoint is set far away from average spot prices, the band effectively tightens on the side closer to where the market is trading, and that is what is happening now.

Since November the spread between the spot rate and the midpoint has tripled. The 14-day moving average of spot RMB is about 6.22 per US dollar, while the average midpoint is 6.12 per US dollar, a record gap.

On Monday, the spot rate came within 10 points of the weak side of the trading band, its closest since the band was widened last year.

The market clearly wants the RMB to weaken, and the PBOC is resorting to intervening to prevent a disorderly decline.

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RC/FL

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