Alex's Blog

The Renminbi and the Dollar

The value of investments and the income they produce can fall as well as rise.

This article from the yesterday provides an interesting follow on from my last post.

As the Chinese look to lessen their reliance on the United States Dollar (USD) as their main trading currency and so the Chinese Renminbi gains prominence as a global trading currency.

The United States is the major trading partner of China and vice versa but with China holding massive USD foreign currency reserves the United States will undoubtedly be nervous about the potential destabilisation of USD with a possible shift towards Renminbi as China’s trading currency of choice.

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If this happens the scale of destabilisation in the United States economy would have major global repercussions.

The Chinese dragon is definitely testing it’s wings but will it be allowed to fly?

China guides renminbi to fresh high against US dollar

By Simon Rabinovitch in Beijing

The Chinese renminbi marched to a record high against the US dollar on Thursday, adding to a recent burst of appreciation and spurring talk that Beijing is poised to soon let the currency trade more freely.

Over the past three weeks the renminbi has gained 0.6 per cent against the dollar, an unusually fast rise for the tightly controlled Chinese currency and one that has come even as the dollar has been relatively strong.

The renminbi’s upward trajectory continued on Thursday after a three-day public holiday, with the central bank setting a record high in its daily fixing of the reference rate for the currency. During the day’s trading, the renminbi reached 6.1537 against the dollar, its strongest ever.

The mini-surge has fuelled speculation that the People’s Bank of China could be preparing the ground for a more flexible exchange rate mechanism.

Currently, the renminbi can rise or fall by 1 per cent from a daily reference rate fixed in the morning by the central bank. Analysts say this trading band may soon be widened to 2 per cent, a gesture by Beijing to show that it wants to move towards a more market-determined exchange rate.

Yi Gang, a central bank deputy governor, said last month that an increase in the renminbi’s floating band was probable “in the near future”.

It would be the second year in a row that the central bank has widened the trading band, having doubled it from 0.5 per cent to 1 per cent last April.

By pushing the renminbi higher, the central bank could be attempting to guide the currency to a level where it is as likely to fall as to rise against the dollar in order to ensure that a wider band does not simply invite traders to bet on appreciation.

“The recent moves may reflect a strategy to accelerate the search for the equilibrium value to eventually dash the one-way plays,” analysts at Citi wrote in a recent note to clients.

Nevertheless, it is easy to overstate the significance of the potential shift to a wider trading band, according to Mark Williams and Wang Qinwei, analysts at Capital Economics.

In a research note on Thursday, they showed that the renminbi’s 1 per cent trading band was already wide enough to accommodate the normal daily fluctuations of completely free-floating currencies such as the dollar and the euro.

The limiting factor in the renminbi’s movement has not been the trading band but rather the central bank’s daily fixing of the currency. Even when pressure for the renminbi to appreciate is strong, as it has been this year, the central bank has continually guided the currency back to a weaker level with its daily fixing and also intervened to buy up the foreign exchange streaming into China, Messrs Williams and Wang said.

“How fast the currency moves over the medium term is determined by how [the central bank] sets the reference rate, not the size of the trading band,” they said.

This article is taken from the, ref.


A CThe Renminbi and the Dollar