China’s new renminbi level set to pressure Asia currencies

China’s central bank on Thursday set the midpoint for the renminbi’s trading band above seven to the dollar for the first time since the global financial crisis, formalising a policy shift that was first revealed earlier this week towards letting the currency weaken.

The level at which the central bank set the target band for the renminbi — at Rmb7.0039 to the dollar, plus or minus 2 per cent — was slightly firmer than expected in a Bloomberg survey of analysts, causing the Chinese currency’s onshore exchange rate to strengthen to Rmb7.0445.

But Ken Cheung Kin Tai, Asian foreign exchange strategist at Mizuho Bank, said setting the fix above seven was “official confirmation” by the People’s Bank of China that the currency is entering a new normal trading range, a move that could weigh in the longer term on Asia-pacific currencies.

The weakening of the currency through the seven to the dollar mark, known by traders as “cracking seven”, comes as the Chinese economy is growing at the slowest

rate in three decades at 6.2 per cent.

The move could help Beijing ameliorate some of the effects of a worsening trade war with the US, with the softer exchange rate offsetting some of the billions of dollars in tariffs that Washington has slapped on Chinese goods in recent months.

The slightly firmer than expected fixed midpoint rate on Thursday boosted most currencies in the region, which have faced downward pressure after the PBOC allowed the currency to breach the seven level during trading on Monday for the first time in 11 years.

While the currency traded above 7 on Monday, Thursday was the first time the PBOC set the midpoint above that level.

The Korean won was up 0.5 per cent against the dollar, the Australian dollar was 0.4 per cent higher and the Philippine peso was up 0.5 per cent.

But in the longer term, the weaker renminbi exchange rate was likely to drive down other Asia-pacific currencies more than during previous spates of devaluation, analysts said.

“Over time, the dollar has become less important for a range of currencies across the region,” said Shaun Roache, chief Asia-pacific economist at S&P Global Ratings.