The Chinese currency slipped Tuesday in its second day of trade since Beijing promised increased "flexibility" in the exchange rate, after mixed signals from Beijing on just how quickly it would allow the currency to appreciate.
China, under pressure from governments around the globe, announced over the weekend that it would proceed with a long-awaited overhaul of its currency regime, igniting hopes that the renminbi is on course to rise against the dollar after Beijing prohibited any gains against the U.S. currency for nearly the past two years. Many economists believe the renminbi is undervalued and gives Chinese goods an unfair advantage in foreign markets.
Early Tuesday, China’s central bank set a key daily reference rate for the renminbi at its highest level in five years, up 0.4 percent from Monday and in line with that day’s gain in over-the-counter trading. It was a closely watched move that suggested Beijing was open to a further rise in the exchange rate.
But by midday, financial news agencies were quoting unidentified currency traders saying that large state-owned banks were buying dollars for renminbi. The news spooked investors and suggested that the Chinese central bank was trying to limit any gains in the currency.
By the end of Tuesday, the renminbi, also known as the yuan, closed down 0.2% at 6.8136 renminbi per dollar.
Beijing appears to be trying to convey a carefully balanced message. On the one hand, it is facing considerable international pressure to allow the renminbi to rise against the dollar, and an announcement on Saturday that there would be more exchange rate flexibility came just days before a meeting of world leaders in Canada this week. On the other hand, Beijing does not want to be seen at home as having succumbed to pressure from abroad.
On Tuesday, this careful balancing act continued by way of comments from Qin Gang, a Foreign Ministry spokesman, who reiterated that reform of the renminbi’s exchange rate regime had to remain gradual and controllable, Reuters reported.
"The underlying message they are trying to convey is that any moves will be very gradual. They are saying to the markets: don’t get too excited, don’t get ahead of yourselves," said Wai Ho Leong, regional economist at Barclays Capital in Singapore.
Still, Monday’s one-day gain of 0.4% in the renminbi against the dollar represented an extraordinary change in China’s currency stance. Beijing has hardly allowed the currency to budge against the dollar over the past two years as it has tried to promote its exports during the global economic and financial crisis.
Officially, the renminbi is allowed to trade as much as 0.5% below or above Beijing’s daily reference rate to the dollar. In reality, the divergence from that level has been much smaller over the past two years.
Stock markets in the Asia-Pacific region had greeted what was widely believed to be the start of a sustained renminbi appreciation with a strong rally on Monday.
