Chinese Renminbi Continues Downward Slide

The Chinese renminbi (RMB) has suffered a further steep fall to conclude a week that has seen its sharpest decline in years as traders reported heavy intervention by the People’s Bank of China (PBOC) to drive the currency lower.

The PBOC’s action is regarded as a deliberate action to punish currency speculators. This week’s fall follows an 18-month period during which the RMB has steadily appreciated, prompting investors to view the currency as a one-way bet. However, after nine successive daily falls, the RMB has lost 1.4% during to finish this week at 6.145 against the US dollar (USD) is its sharpest since China revalued the currency in 2005.

Over the past nine years the RMB has increasingly found favour with international investors. Regarded as a relatively low-risk, high-yield currency it has gained more than 35% against the dollar over the period.

The recent sudden reversal of the RMB’s fortunes has added to global investor nervousness about China’s slowing economy, high levels of local government debt and an increasingly risky shadow banking system. Analysts and investors have also warned that Chinese companies will face billions of dollars in losses from complex hedging products if the RMB weakens further.

The PBOC’s increasing intervention to weaken the currency comes ahead of a key government meeting next week which may be used as a platform to unveil more Chinese market reforms.

Despite the decline of the past two weeks, most banks still expect the RMB to resume its upward climb climb shortly. HSBC analysts said the recent reversal had created more uncertainty in the market but maintained their forecast that the RMB would still finish the year at 5.98 to the USD, for a gain of 3%.

“We do not think the current bout of RMB weakness should be considered ‘out of control’, and do not think there is a significant risk of a shift in the broader path of the RMB,” they said.

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