The People’s Bank is not pleased

The People’s Bank purchased nearly $6bn in foreign exchange last month, by our estimate. That’s not much in the context of China’s cross-border trade and investment flows. But it was the biggest purchase in six years. Then, earlier this month, while cutting the reserve requirement applied to renminbi-denominated deposits, the PBOC raised the reserve requirement for foreign currency accounts. That is likely to have prompted a transfer of close to $20bn in foreign exchange from commercial banks to the central bank. Both moves are overt signals that the PBOC is unhappy with the strength of the renminbi. In recent years, the PBOC has hidden its interventions: the breakdown of the previously-tight relationship between banking system net FX settlement and PBOC net FX purchases suggests that some other entity was intervening on the PBOC’s behalf. Now though, the PBOC appears to want its efforts to stem the renminbi’s strength to be known. We think it will get its way, and expect the renminbi to weaken from 6.37/$ now to 6.90/$ at the end of next year.