Chinese Currency Falls to Lowest Level in Nearly a Year

SHANGHAI — The value of China’s currency, the renminbi, continued to slide against the United States dollar on Friday, rattling investors by falling to its lowest level in nearly a year.

With a drop of 0.3 percent, the renminbi hit 6.145 to the dollar in Friday trading, helping reverse a long running trend of gradual, incremental appreciation against the dollar and other major currencies during the last eight years. The intraday drop of almost 1 percent Friday was the biggest in years.
Analysts believe China’s central bank is intervening in the currency markets, intentionally engineering a slide in the value of the Chinese currency to punish speculators and prevent huge capital flows, or so-called hot money, from entering the country.

The authorities worry that the large inflows could generate inflationary pressure and complicate the central government’s effort to restructure China’s economy and eventually free up interest rates and improve the banking system.

Still, few analysts expect China’s currency to continue to weaken against the dollar. Many economists are forecasting the renminbi to end 2014 just about where it began, about 6 yuan to the dollar, or slight stronger, at about 5.9.

While the Chinese authorities maintain tight control over the flow of money into the country, global investors have found ways to funnel hot money into the country, often through trade financing deals. Speculators do so hoping to capitalize on something not so easy to find outside of China: an economy wedded to fast growth, high interest rates and a steadily appreciating currency.

Last year, the renminbi was one of the world’s strongest performing currencies.

“It’s hard to completely stop it” from flowing into China, Wang Tao, the chief China economist at UBS, said of the hot money. “Offshore, the interest rates are low; Chinese interest rates are really high. And if the exchange rate is appreciating, investors view it as a win-win.”

By weakening the value of the renminbi, also known as the yuan, the authorities here apparently hope to make it harder for speculators to engage in a one-way bet on a rising yuan, what is essentially an arbitrage game between interest rates in the advanced economies outside and higher rates in the more tightly controlled Chinese system. For speculators, currency appreciation is seen as an added benefit.

But low interest rates in the United States and Europe mean that there are few places to safely invest. At the same time, Chinese companies are desperate for cash because of rising interest rates at home and tighter bank liquidity.

The huge inflows of capital are showing up in China’s economic figures, with some analysts estimating hot money inflows last year at $150 billion. Analysts say the government wants speculators to know that making such a bet on appreciation could backfire, if appreciation slows or even reverses course, and that is why the last few days have been so volatile.

In a statement this week, China’s State Administration of Foreign Exchange, a division under the central bank, suggested the market volatility had been normal. “The recent movement of the renminbi exchange rate is the result of market players adjusting their near-term renminbi trading strategies,” it said. “The degree of exchange rate volatility is normal by the standards of developed and emerging markets. There is no need to overinterpret it.”

Source: nytimes