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Renminbi extends slide as PBoC lowers midpoint fix

The renminbi extended its slide on Tuesday after China’s central bank lowered the midpoint around which the currency can trade against the US dollar by the most since January.

The decline followed the Chinese currency’s worst day in three months on Monday after the People’s Bank of China on Friday dropped a requirement raising the cost of betting on renminbi depreciation, and scrapped a requirement that banks hold reserves against renminbi deposits held in Hong Kong and other offshore centres.

On Tuesday, the PBoC set the daily fix — the midpoint around which the renminbi can trade 2 per cent in either direction against the dollar — at Rmb6.5277, which was 0.4 per cent softer than the previous day and the most significant weakening since January 9.

That prompted the onshore exchange rate for the renminbi to weaken as much as 0.3 per cent to Rmb6.548 against the dollar, bringing it down a cumulative 1.7 per cent from Friday’s peak.

The offshore rate, which is not bound by the PBoC band, eased as much as 0.2 per cent to Rmb6.5518 per dollar.

Analysts said the government’s latest steps highlighted Beijing’s increasing confidence in its ability to exert control over the currency’s exchange rate and capital outflows.

Aidan Yao, senior emerging Asia economist at AXA Investment Managers, said the move to reverse the reserve requirement in particular was “partly a return to normality and partly a signal that Beijing does not want to see one-way expectations in the market flipping from depreciation to appreciation”.

The PBoC faced difficulties in the first half of 2017 from persistent expectations among investors of continued currency depreciation due to capital outflows, which drove the renminbi lower against the dollar and forced the central bank to burn off foreign exchange reserves to prevent more serious softening.

That trend had reversed by late June, however, and on Friday the renminbi hit its highest against the dollar since December 2015, erasing a record 6.5 per cent drop notched in 2016.

Mark Williams, chief Asia economist at Capital Economics, said the latest policy moves did not reflect official concerns over the renminbi’s strength per se, but rather investor perceptions.

“Having finally succeeded — by taking advantage of the globally-weak dollar — in dislodging the view that the renminbi will only depreciate,” he wrote, “the last thing the PBoC would want now would be to see expectations build that create pressure for the renminbi to move higher.”