Renminbi market liberalisation gets closer
China has allowed the renminbi to depreciate further, which may cause competitive devaluations in other emerging markets
The People's Bank of China (PBoC) announced a record adjustment to the 'renminbi fixing' (the daily reference exchange rate set by the PBoC), raising it 1.9% against the dollar. It also announced a change in the pricing mechanism of the daily fixing, to refer to the previous day's closing rate and to take foreign-exchange-market movements into account. This move will allow the currency to depreciate more in future and represents a further step towards foreign-exchange market liberalisation. The PBoC cited a sharp renminbi real effective exchange rate (REER) appreciation and spot deviations from the daily fix as reasons for acting. The currency has been strong recently (its REER has appreciated 18.9% since mid-2014), driven by the stronger dollar. Weak July trade data released on August 8 increased pressure on authorities to act. The PBoC will also improve the renminbi's flexibility, moving towards convergence of onshore and offshore exchange rates.
Our judgement
Following today's move, renminbi fixing will be more market-dependent. The Chinese currency could potentially depreciate more than it was able to do previously. The changes will also alleviate some short-term pressure to widen the trading band.
See CHINA: Renminbi internationalisation will gather pace - May 20, 2015.