HONG KONG, May 14 (Reuters Breakingviews): Investors have intervention on the brain. Following the Bank of Japan's recent attempt to halt the yen's slide against an ascendant US dollar, clients are peppering banks with questions about whether Beijing might soon devalue the renminbi to give Chinese exporters an edge and bolster sluggish growth at home. Such a move would be self-defeating, for now.
For one, exports have been robust this year. An economist at one large European lender notes his recent tour of Chinese manufacturers yielded zero complaints about currency strength. An artificial drop may also prompt other regional exporters like South Korea, Indonesia and Vietnam to make a similar move, providing little advantage.
Worse, such a fall would spur greater outflows from Chinese markets.
It would also become costlier for Chinese corporates - including cash-strapped developers - to make payments on outstanding dollar obligations. Data from the Bank for International Settlements show global banks' cross-border claims on Chinese entities totalled $526 billion at the end of 2023.
China learned the dangers of shock devaluation the hard way. In 2015, that action triggered a rout so severe the People's Bank of China burnt through $1 trillion of foreign reserves and bolted on new capital controls to halt the fall. Today the exchange rate, which can trade 2 per cent in either direction of a daily midpoint set by the central bank, is stuck fast against the weak side of that trading band, as the US Federal Reserve's higher-for-longer rates regime incentivises investors to shun low-yielding Chinese bonds in favor of Treasuries.
Little wonder that in January a strong currency topped President Xi Jinping's list of priorities for making China into a "financial powerhouse". Inflicting fresh scars on the currency's few major foreign holders would only hurt long-term ambitions to internationalise the renminbi too.
This preference for stability could be tested in November if Donald Trump returns to the White House. The man behind the first US-China trade war has threatened tariffs of 60 per cent on Chinese goods if elected. That might be enough to naturally crater the currency.
Allowing a sharp one-off fall now risks giving away the central bank's preferred level, potentially creating a line in the sand it would then have to defend. A long, slow grind lower better suits Beijing's interests.
The Chinese renminbi has weakened 1.9 per cent against the US dollar this year.
The onshore exchange rate on May 13 hit 7.2332 per dollar to trade 1.8 per cent weaker than People's Bank of China daily reference rate, which limits the transactions to 2 per cent above or below the midpoint.
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