China permits strong renminbi to raise domestic demand

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BEIJING • Beijing is allowing faster gains in the as it seeks to cheapen imports and bolster weak consumer spending.

That is one theory touted by DBS Bank and Mizuho Bank, which say a stronger renminbi is ideal for Beijing at a time when Chinese President Xi Jinping is pushing for a more self-reliant economy.

That marks a shift from when officials worried that a renminbi would undercut the nation’s exports to the world.

The daily currency fixings show ’s equanimity towards accelerating gains in the renminbi, with the central bank refraining from sending clear warning signals to traders. That is even as the currency gained nearly 5 per cent from late May versus the dollar to its highest level in more than a year.

The fixings – a tool the People’s Bank of China often uses to limit currency strength – have generally been tracking the market higher as the dollar has weakened.

A stronger exchange rate also helps remove a flashpoint in relations with the United States, with President Donald Trump having long accused China of keeping the renminbi artificially weak.

Additionally, banks will be more inclined to hold a currency that is not depreciating, which in turn would help Beijing reduce the financial sector’s reliance on the greenback.

“Tolerance towards a stronger yuan when it is fundamentally driven is going to be high,” said Ms Wang Ju, director and senior foreign exchange strategist at HSBC Holdings in Hong Kong. “A stronger yuan would help China diversify away from the dollar and optimise its resource allocation.”

The currency’s rally since this year’s nadir in late May has made it one of the best performers in Asia, with the buying momentum still standing close to the strongest since January.

The renminbi’s large interest-rate premium over the yield on the dollar also helped to boost .

Such strength is already helping China, which was reported to be buying a record amount of American soya beans this year as lower prices help it boost purchases pledged under the trade deal. But still, the economy remains fragile – the country’s imports contracted in all but one month since March, while retail sales came out worse than economists had expected for five months in a row.

BENEFITS OF A STRONGER RENMINBI

Tolerance towards a stronger yuan when it is fundamentally driven is going to be high. A stronger yuan would help China diversify away from the dollar and optimise its resource allocation.

MS WANG JU, director and senior foreign exchange strategist at HSBC Holdings in Hong Kong.

“The stronger yuan could stimulate imports and further expand the domestic consumption market,” said Mr Ken Cheung, chief Asia currency strategist at Mizuho. “China’s leaders will be less tempted to use depreciation to stimulate the economy, as the export sector plays a secondary role in growth now.”

But this does not mean Beijing will let the renminbi run wild.

A key indicator of strength is the CFETS RMB Index, which tracks the renminbi against 24 peers. It shows the renminbi has appreciated about 2.3 per cent against them since the start of last month.

The central bank may set the fixing at weaker-than-expected levels if the gauge jumps rapidly to a point where the strength eats into exports, said Mr Tommy Ong, managing director for treasury and markets at DBS Hong Kong.

The renminbi last traded at 6.8395 per dollar.

But for now, the renminbi has room to advance further, said Mr Ong, who sees demand for the greenback being reduced after the US presidential election in November. “A stronger yuan is a better fit for China’s growth model,” he said, predicting the currency to hit 6.7 per dollar by the year end.

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