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RMB Largest Ever Monthly Depreciation

RMB Largest Ever Monthly Depreciation

(2 July 2018 - China) China's Renminbi (RMB) currency suffered its largest ever monthly fall against the US dollar last month, leading many market participants to speculate that a return to ‘currency wars’ could occur if Beijing is seeking to use currency devaluation as a retaliatory tool against the rising trade war with US President Donald Trump.

The RMB fell by three percent against the USD in June, the sharpest monthly slide in the currency pair since China’s FX market establishment in 1994. The Chinese central bank (PBOC) outlaid $US1t in FX reserves through 2016 to shore up the currency against a risk of correction. Ructions are being felt outside of FX markets as equites also fell and Belt and Road related investment tapered slightly. China has begun a broad, interagency review of how many deals have already been done as part of the wide ranging BRI, on what financial terms and with which countries.

Commodity markets are also experiencing rising volatility. China's measures to shut down inefficient steel mills over the past two years to curb damaging air pollution has pushed steel prices to six year highs. China produces half of the world's steel and pollution controls were a factor in its steel exports falling 30 percent last year to 75 million tonnes. Citigroup sees GDP growth easing to 6.5 percent during the second half of 2018 as the government has made checking systemic risk a key priority and it estimated that the disruption of trade with the US could drag down Chinese growth between 20 and 40 basis points.

“If it starts to look like a conscious effort to depreciate significantly to offset the impact of tariffs, there's a much greater chance it will attract attention” commented Brad Setser, former deputy assistant US treasury secretary for international economics and senior fellow at the Council on Foreign Relations. “For now, it's relatively easy to explain the renminbi's move in the context of China's efforts to manage its currency against a basket"

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