MacroscopeChina still fighting an uphill battle to stabilise renminbi
The chance is low of a large, one-off adjustment on the yuan’s exchange rate, although we won’t write it off completely
Volatility in the renminbi offshore markets surged at the start of 2017. Due to a sudden dry up of CNH liquidity, the overnight interest rate in the money market – the Hong Kong InterBank Offered Rate (HIBOR) – shot up to 61% on January 6, the highest since the same period of last year.
As the HIBOR represents the crucial funding cost for short-selling the CNH – a trade that has become very crowded lately – the surging rate has led a sharp unwinding of these short positions and a subsequent plunge in the CNH/USD.
Even though the market has quickly normalised after the short jitter with the renminbi stabilizing, it will be wrong to think that China is out of the woods with respect to its depreciating currency and capital outflows.
One factor that could unsettle the current market calm is if the Trump administration announces policies that are detrimental to the Chinese economy after his inauguration.
These may include labelling -- or ordering an investigation of -- China as a currency manipulator, and/or initiating trade protectionist measures against Chinese products.
Against that backdrop, the Chinese authorities have taken a number of precautionary measures to build a firewall against a potential resurgence of market volatility. These include: