The offshore renminbi exchange rate fell to a record low on Wednesday, putting further pressure on the People’s Bank of China to intervene directly to prop up the country’s currency.
The offshore rate fell as much as 0.7 percent to Rmb7.2281 against the dollar, the lowest on record since Hong Kong clearing banks were first allowed to freely open renminbi accounts in 2010.
Meanwhile, the more tightly regulated onshore rate also fell 0.7 percent to Rmb 7,225. That decline caused onshore interest rates to fall 13.6 percent year-to-date, underscoring the impact of widening policy divergence between a dovish China, which wants to support growth, and a hawkish US Federal Reserve.
Measures taken by the People’s Bank of China have so far been limited to deploying sizeable foreign exchange reserves, relying instead on indirect measures to deter bets on continued weakness and slow the pace of depreciation.
On Monday, the central bank introduced new measures that effectively make it more expensive to short the currency.
The offshore renminbi, introduced to facilitate greater international use of the Chinese currency, is not subject to the onshore dollar’s trading range, which limits movements to 2 percent in either direction from a midpoint set by the central bank each morning.
However, following a severe sell-off in 2015 triggered by a one-off devaluation, Chinese authorities throttled liquidity in the Hong Kong market and the offshore renminbi has closely tracked the onshore rate since then.
“With little the PBoC can do to change the fundamental forces driving the dollar’s gains, attempts to reverse market trends would likely fail and undermine its credibility,” said Wei He, an analyst at Gavekal Dragonomics.
“Probably the better way is to allow the current trend to continue while limiting volatility and waiting for the inevitable directional reversal.”
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