The renminbi has fallen more than 2.5 per cent against the US dollar since mid-February, a small amount for most emerging markets but a dramatic shift for the Chinese currency following years of slow and steady appreciation. It trades at Rmb 6.20 against the US dollar, roughly the same level as this time last year.
The US comments highlight concern in Washington that China will be tempted to respond to a slowing economy by holding down its currency in order to boost exports. Such moves could lead China to reduce global demand at a time when several other regions of the world, such as the eurozone, are weak. That in turn could hamper US growth.
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The fall in the renminbi has been widely seen as an engineered policy move by the country's central bank, which has the ability to move the currency through a daily fixing rate, and through direct intervention. The renminbi can now trade higher or lower from its mandated fix by 2 per cent a day following the recent widening of the official trading band.
However, most analysts believe that Beijing's decision to weaken the renminbi was not a ploy to boost competitiveness. Instead, the authorities have sought to stamp out currency speculation from companies and investors who had treated the renminbi as a one-way bet by introducing more meaningful two-way volatility. It also has the positive side-effect of increasing domestic liquidity at a time when stress within the financial system is rising.