Thursday, May 23, 2019

Currencies: "Why China doesn't want to breach its renminbi red line"

From FT Alphaville:
Since the Trump administration announced new tariffs on Chinese imports and Beijing retaliated with its own earlier this month, China's currency has weakened to Rmb6.9 per dollar. With trade tensions elevated, the further depreciation has sparked fears that the renminbi will soon cross the all-important, psychological level of Rmb7.0 per dollar.

Given that Chinese policymakers do not allow the renminbi to trade freely and instead intervene as they see fit, whether or not the currency weakens past this level remains more or less in their hands. And right now, it is not in the country's self-interest to see the renminbi blow through this threshold.
For one, the move would bring about significant volatility for not only Chinese assets but across global capital markets more broadly. Beijing has little appetite for this outcome given it's longer-term plans of putting its slowing economy on firmer footing, according to Hans Redeker of Morgan Stanley:
Authorities have repeatedly emphasised their focus on sustainable growth, i.e. an economic expansion not funded by pushing domestic debt gearing up further. China needs foreign capital to grow and this capital will only find its way into China is investors see prospects of stability. This is why RMB volatility is not helpful and therefore not in China's interest.
The need for foreign capital only grows as China's current account surplus continues to shrink....