CHINA: Renminbi could depreciate more than PBoC wants
PBoC sets renminbi fixing lower for the third consecutive day
The People's Bank of China (PBoC) today devalued the renminbi for the third consecutive day, setting its daily fixing 1.1% weaker than yesterday, at a reference rate of 6.401 against the dollar. Today's depreciation is modest compared to the previous two days (1.9% and 1.6%, respectively), but enough to drive down both the onshore and offshore renminbi exchange rates against the dollar. Also today, PBoC Vice Governor Yi Gang said that the PBoC will keep stepping in when the market is 'distorted'. He said that there was no economic basis for the renminbi to continue depreciating and that the central bank's goal is to keep the exchange rate stable. Reports that the Bank is looking for a 10% depreciation to support exports are groundless, he said. The PBoC will monitor cross-border capital flows closely.
Our judgement
The PBoC will have to intervene more in forex markets to prevent the exchange rate from depreciating too sharply. Risks of a sharper-than-desired depreciation remain, given the weak growth outlook for the Chinese economy and the strong year-to-date real effective exchange rate appreciation of the currency. Further monetary easing is likely, given the downside risks to growth.
See CHINA: Positive signs emerge in second-quarter GDP - July 17, 2015.