Oct 28, 2020 - Economy

China announces removal of more currency controls

Binoculars with China flag in lenses

Illustration: Sarah Grillo/Axios

Chinese policymakers are now taking aim at currency controls that have kept the renminbi from weakening in recent years as the currency has rallied to its strongest level against the dollar in years and the country attempts to attract more outside capital.

What's happening: Chinese banks have stopped using the counter-cyclical factor recently, which means Beijing will give up some influence over the exchange rate, Bloomberg reports, citing the website of the China Foreign Exchange Trade System.

  • The change allows lenders more room to submit quotes for a weaker fixing and guide the currency lower in the spot market.

What it means: China's central bank "fixes" the renminbi at a certain level every day that keeps the currency's value from moving by more than 2% above or below that level.

  • The change follows the central bank's decision earlier this month to make it cheaper for bankers to short, or bet that the renminbi would fall in value.

Why it matters: Dropping the counter-cyclical factor “is the strongest tool other than direct intervention in the market that the PBOC has to change the value of the currency,” Dariusz Kowalczyk, senior emerging-markets strategist at Credit Agricole CIB, tells Bloomberg.

Yes, but: China previously suspended the counter-cyclical factor in 2018 only to reinstate it when trade tensions with the U.S. ramped up and its currency began to weaken again.

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