China’s central bank has raised the cost of betting on renminbi depreciation, a move intended to stabilise its currency following a torrid period for the country’s stock markets.
The renminbi weakened as much as 0.7 per cent on Friday to Rmb6.8935 against the US dollar, its lowest level since the end of May 2017.
In response, the People’s Bank of China announced the re-imposition of a 20 per cent reserve requirement on banks that sell dollars to clients using currency forwards. Banks will pass the cost of this requirement on to their clients, raising the cost of betting on renminbi weakness.
The decision sparked a rally in the offshore renminbi, which trades at major hubs outside of mainland China. It was recently up 0.7 per cent on the day against the greenback.
The PBoC’s intervention comes as investors sell out of Chinese stocks against a backdrop of growing economic uncertainty.
Amid signs of a slowing domestic economy, Sino-US trade friction continues to gather pace — tension that was exacerbated this week after the US said it would consider doubling its proposed tariffs on $200bn in annual imports from China.
Chinese stocks have come under pressure since the US first imposed tariffs in January, when US president Donald Trump introduced a 30 per cent levy on solar panels — a significant Chinese export to America.
The CSI 300 index of large-cap stocks listed on the Shanghai and Shenzhen exchanges has fallen more than 17 per cent this year, marking it as the worst-performing big equity market globally this year.
This stock sell-off has been putting pressure on the renminbi. The onshore renminbi has plunged to become one of the worst-performing emerging market currencies this year, down against the dollar by 5.21 per cent.
“We expect further depreciation and for the renminbi to reach 7 by the year-end; it could go past 7 next year,” said Jackit Wong, a global markets researcher at MUFG. “We have been quite concerned about renminbi weakness. We’ve seen economic growth moderation [in China], credit issues, and US-China trade tension has been escalating.”
EM equities and currencies have been hit hard this year, with the Argentine peso down 32 per cent and the Turkish lira falling 25 per cent.
However, some investors said the Chinese equity market sell-off was unlikely to affect other EMs, damping fears of contagion risk.
Daniel Morris, a senior investment strategist at BNP Paribas Asset Management, said the drivers of the declines in China were specific to the country — deleveraging and tariffs — and were “not broader EM concerns”.
“While clearly China GDP growth has a significant impact across the world, the Chinese equity markets are reflecting concerns that are not yet very apparent in other EM countries,” he added.