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China is looking at measures that have not been used since the global financial crisis to soften a currency while countries are raising commodity prices and slowing growth as analysts predict more action in the future.
The move by the People’s Bank of China, which will force lenders to hold more foreign currency, indicates that politicians have decided to seek renminbi gains after touching it. the strongest level against the dollar for three years in the last week. This led to a setback in the Trump administration’s years, which he labeled Beijing as currency manipulator After surpassing the important Rmb7 per level of the renminbi dollar in 2019.
According to the PBoC, the central bank’s actions announced on Monday will increase the required reserves of Chinese financial institutions from 5% to 7% of foreign currency deposits to “strengthen foreign exchange liquidity management,” according to the PBoC.
Analysts say this is the highest growth ever, and the first since the global financial crisis. The strength of the renminbi has created another headache for China’s policy makers already facing commodity prices and risks to the growing economy.
The Chinese currency has strengthened nearly 11 percent against the dollar in the last 12 months. The renminbi traded on the ground changed slightly in the new dollar on Rmb6.3696 on Tuesday, but analysts said more intervention could be made in the currency markets.
“The move is aimed at cooling the rapid estimate of the land renminbi by reducing the target [foreign currency] in the liquidity system, ”said Becky Liu, China Charter’s macro strategist at Standard Chartered, and estimates that the rise would waste about $ 20 billion in liquidity in the country’s foreign exchange market.
The requirement will limit domestic supply of foreign currencies, and it will be more difficult to use dollars to buy renminbi on the ground, which will ease the demand for Chinese currency.
“The PBoC’s action highlighted its stance against renminbi appreciation and quick advice [at] more measures to come, ”said Ken Cheung, Asia’s top currency strategist at Mizuho Bank.
However, some officials in China have advocated for a stronger renminbi. This month a PBoC official wrote an editorial, which was later deleted, arguing that the central bank should value the currency deal. increasing global commodity prices. A stronger Chinese currency could make foreign commodity imports cheaper.
Higher raw material prices they have raised factory door prices in China and sparked fears of inflation. At a cabinet meeting chaired by Premier Li Keqiang last month, he said measures should be taken to stop inflation in producer prices, which rose by 6.8 percent in April as consumer prices inflation remained low. Producer prices fell throughout 2020.
There are also signs that China is cooling off with a strong economic recovery from Covid-19. Quarterly, economy only 0.6 per cen has spreadin the first three months of the year, according to the National Statistics Office, below forecasts.
China’s exports, which in theory take advantage of weak renminbi, have risen in recent years despite the strengthening of the currency. Exports rose $ 32 percent annually in April, reflecting China’s dominance in global trade as it quickly recovered from the pandemic.
However, “the large renminbi forces are weakening the competitiveness of China’s export sector,” Cheung added.
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