The Chinese central bank spent more than a year setting a bottom line for the continuously falling Renminbi. Now, facing a sudden appreciation of the Renminbi, the Chinese Communist Party is equally distressed.
Due to various factors, foreign capital continues to withdraw from China, putting pressure on the Renminbi exchange rate. Data shows that foreign capital reduced holdings of Chinese yuan bonds in banks by approximately 40 billion yuan (about 175 billion New Taiwan dollars) in July, ending two consecutive months of net purchases, indicating a lack of confidence in China. Now, the Renminbi’s appreciation is also causing pressure in Beijing.
On August 23, Reuters reported that although the Renminbi strengthened by 1.3% against the US dollar in August, this was not due to any changes in domestic economic weakness or factors such as capital flight, but rather the impact of increased expectations of a Federal Reserve rate cut (weakening of the US dollar) and the appreciation of the Japanese yen.
Facing over a year of depreciation of the Renminbi, the current appreciation has become a new problem for the Chinese Communist Party because the appreciation could disrupt the fragile domestic financial market and harm exports. In response, authorities quietly loosened restrictions on gold imports and some bank Renminbi trading positions.
Gary Ng, Senior Economist for Asia Pacific at Natixis, expressed, “With the Federal Reserve finally cutting interest rates, the pressure on the Renminbi may ease, but there may be sudden and significant fluctuations in capital flows.”
One important reason causing a headache for the Chinese central bank is that since the beginning of 2023 when the Renminbi steadily declined, speculative Renminbi short positions have continued to increase. If the Renminbi appreciates rapidly, these positions may be completely closed out.
Foreign companies operating in China, domestic exporters, and investors have converted Renminbi to US dollars to earn better returns in activities known as Renminbi arbitrage trading.
Analysts at Macquarie Group estimate that since 2022, exporters and multinational companies have collectively held over $500 billion in foreign exchange.
Zhu Chaoping, Global Market Strategist at J.P. Morgan Asset Management, stated, “With the Renminbi appreciating… concerns may arise about the possible unwinding of Renminbi arbitrage trading and potential impacts on the financial markets.”
The State Administration of Foreign Exchange (SAFE) and the Chinese central bank did not immediately respond to Reuters’ requests for comment.
Liu Yang, General Manager of the Financial Markets Department at Zhejiang Merchants Development Group, a mineral export company, stated, “Apart from the Federal Reserve rate cut, foreign exchange settlement is the most concerning issue for everyone in the market.”
Liu Yang mentioned that a significant appreciation of the Renminbi would weaken the competitiveness of export products.
Currently, many countries are already taking countermeasures to address the challenge of exporting excess capacity products from China overseas.
According to Reuters, the Chinese central bank has provided new gold import quotas to Chinese banks. When the Renminbi faces depreciation pressure, gold imports are usually restricted.
US bank analysts predict that with slowing economic growth and the Chinese central bank’s loose stance, the Renminbi will continue to depreciate. They estimate that by the end of the year, the Renminbi’s exchange rate against the US dollar will reach 7.38, while the current exchange rate is approximately 7.14 Renminbi to the US dollar.