At the beginning of this week, the People's Bank of China set its reference rate for USD-CNY at 7.0930. This was, for the first time, below the rate set on November 6, right before the results of the US presidential election were known, after which the PBoC allowed the CNY to depreciate in anticipation of higher tariffs by the Trump administration, Commerzbank's FX analyst Volkmar Baur notes.

Chinese exports continue to perform very robustly

"In theory, the PBoC sets a daily reference rate daily, and is letting market forces determine the exchange rate that is allowed to deviate by 2% above or below the reference. This rate is therefore the mid point of a band within which the exchange rate can move freely – at least in theory. Since last November, however, it can be observed that the daily reference value no longer functions as the midpoint of the band, but rather as a lower limit. At least since then, the exchange rate has not fallen below the reference value. The CNY is therefore trading continuously weaker than the reference value would imply."

"This is surprising, as Chinese exports continue to perform very robustly, which should actually support the currency. Direct exports to the US have been around 25% below the value for the same period last year in the last six months (i.e., since “Liberation Day”). Overall, however, exports measured in US dollars have recently risen by around 8% compared with the previous year. At the same time, however, imports have developed much less dynamically – as a result, China's foreign trade surplus has recently risen even faster than exports."

"All of this should actually put the currency under appreciation pressure. Or, due to interventions, it should result in an increase in currency reserves. However, the latter has not been evident in recent months. In renminbi terms, the central bank's currency reserves have even fallen slightly in recent months. On the other hand, foreign assets held by Chinese banks and US dollar deposits in the Hong Kong banking system have risen. It may therefore be that Chinese exporters are willing to hold US dollars. This could well be because short-term interest rates for the US dollar are higher than for CNY deposits. However, it could also be that state banks are instructed not to exchange US dollars back into CNY in order to avoid putting the currency under appreciation pressure. Be that as it may, USD/CNY remains politically determined."