China’s currency renminbi, or yuan, weakened against the US dollar, on Thursday, falling to nearly eight-year lows against the dollar, over fears of capital outflows after the American Federal Reserve decided to raise the benchmark interest rate for the first time this year. The central parity rate of the renminbi weakened 261 basis points to 6.9289 against the US dollar today, according to the China Foreign Exchange Trading System.
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The Federal Reserve yesterday raised the benchmark interest rate by 25 basis points, the first and the only time in 2016, and indicated a faster rate hike pace next year. The Fed released its updated economic projections indicating that the central bank expects to raise rates three times next year, compared to the two times suggested in its September projections.
Analysts said that with a rate-hike largely priced in before Wednesday, the greenback was supported by speculations of more rate-hikes next year. As the Chinese economy maintains medium-high growth, the renminbi has the conditions to remain basically stable, China’s National Bureau of Statistics (NBS) said.
Judging from the nation’s economic fundamentals, the economy will maintain medium-high growth with a trade surplus and abundant foreign reserves, Mao Shengyong, spokesperson for the NBS, told media earlier this week.
Other factors, such as the Belt and Road Initiative and the yuan’s inclusion in the IMF Special Drawing Right (SDR) currency basket will also increase global demand for renminbi assets, state-run Xinhua news agency quoted Mao as saying.
In China’s spot foreign exchange market, the yuan is allowed to rise or fall by 2 per cent from the central parity rate each trading day. The central parity rate of the yuan against the US dollar is based on a weighted average of prices offered by market makers before the opening of the interbank market each business day.
The interest rate hike will add pressure to the yuan’s depreciation, affecting companies with heavy investment in China, such as Chinese insurers and banks, said Castor Pang Wai-san, head of research at Core Pacific-Yamaichi International (Hong Kong).
While local banking stocks like Hang Seng Bank and Bank of China Hong Kong are expected to gain from the rate hike, most of them did not perform well this morning because “the (benchmark) index performance is too bad”, he told Hong Kong based South China Morning Post on Thursday.
Also the US interest rate rise on Wednesday is likely to lead to increased capital outflow from Hong Kong and the mainland, according to analysts.
“With the US interest rates now rising, it’s expected that some of the estimated USD 130 billion of capital inflow into Hong Kong since 2008 will be exchanged back to the US dollar,” the Hong Kong Monetary Authority’s chief executive Norman Chan told media in Hong Kong on Thursday.
“A capital outflow from Hong Kong is expected, and the Hong Kong dollar may trade at the weaker end of the peg at HK$7.85 per US dollar,” he said.
Marc Chandler, global head of currency strategy at Brown Brothers Harriman, said the US interest rate rises will mean the greenback will continue to strengthen against the yuan, pushing the Chinese currency to as low as 7.20 yuan/dollar by the end of next year, down 4 per cent from the 6.90 current level.
“Part of the outflow from China, especially the part that reflects the paying down of dollar debt, may continue,” Chandler was quoted as saying by the Post.