China's currency drops most in two years

25/02/2014 07:47 AST

The onshore renminbi has staged its biggest one-day drop in over two years, leading analysts to guess that the central bank, which carefully manages the currency's moves, is experimenting with introducing some volatility.

The renminbi is traded onshore between banks and exporters, but with a heavy guiding hand from the People's Bank of China.

The currency is down 0.26 per cent to 6.1136 per US dollar. This is tiny by international standards, but for the highly controlled renminbi it is significant.

While the move partly reflects Chinese market sentiment, analysts are attributing it to the PBoC experimenting with currency volatility as a precursor to allowing more flexibility.

"This could be shaking the tree, potentially as a step towards reform," Scotiabank senior currency strategist Sacha Tihanyi said.

Deutsche Bank analysts added:

We believe introducing two-way volatility is consistent with PBoC's medium term objective to increase the flexibility of RMB exchange rate.

Other analysts have speculated the central bank engineered the drop to deter expectations of a further rise in the renminbi and stop speculators illicitly moving money into China, perhaps to participate in the ongoing real estate frenzy or to buy the high-yielding wealth management products that have fuelled the shadow banking boom.

The Chinese government also heavily controls the flow of foreign exchange over its borders.


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