1. 36 CORPORATE TREASURER FEBRUARY / MARCH 2016CORPORATE TREASURER FEBRUARY / MARCH 2016
Corporate treasurers at both Chinese and foreign companies face
new uncertainties regarding how the People’s Bank of China fixes the
renminbi against the US dollar, and where the currency might head next
Ann Shi reports
W
hen Ben Bernanke makes
a suggestion about
central banking,
it’s probably a
good idea to
listen. During a January
19 appearance in Hong
Kong, at the Asia
Financial Forum, the
former chairman of
the US Federal Reserve
said the People’s Bank of
China (PBoC) could be
more clear about how
it now fixes the value
of the renminbi.
“The PBoC has not
been as transparent
as they usually are on
what they are trying to
achieve,” Bernanke said. “If
they want to tie [the renminbi]
to a basket [of currencies], for
example, it might be useful to say
that.”
He was referring to the exchange rate
index the China Foreign Exchange Trade
System (CFETS) officially launched on
December 11, 2015.
The index is a measure of the renminbi’s
stability level against a basket of 13
currencies, including the dollar, the euro,
and the Japanese yen, with weightings
based mainly on international trade
volumes. Market participants see this
index as a new way for China to signal
where it would like to see the renminbi go.
To Bernanke’s point, the PBoC has
The
renminbi
riddle
China focus.indd 36 2/22/16 4:36 PM

2. THECORPORATETREASURER.COM FEBRUARY / MARCH 2016 CORPORATE TREASURER 37
SECTORFOCUS
On January 8, the RMB exchange
rate index dropped below 100;
on the same day, the PBoC
strengthened its currency fix.
THECORPORATETREASURER.COM
“These sort of ad-hoc changes make
it hard for anyone to understand
what the policy methodoligy is”
Source: CFETS, ANZ, The Corporate Treasurer
CFETS: RMB exchange rate index versus the RMB fix point
yet to officially disclose whether or
how it refers to the index when setting
the renminbi’s fixed rates, or what
the methodology might be. Its chief
economist, Ma Jun, did say in January
that the PBoC is taking into account index
stability in setting the daily fix.
TURBULENT TIMES
Such methods to provide stability are
welcomed by market participants,
including treasurers and investors. It is
not clear, however, how or if the PBoC will
use the CFETS index to do so.
Khoon Goh, senior foreign exchange
strategist at ANZ, believes the 100 level
in the index (which represents par) is
an important floor at present. When the
index fell slightly below 100 on January
8 (99.92), reflecting the renminbi’s drop
in value against the basket, the PBoC
started to change the fix to strengthen
the renminbi against the dollar, he
explained (see chart).
FIX THE RMB
The renminbi has grown
increasingly volatile since
August, when the PBoC first
moved the renminbi away
from a strict peg against the
US dollar.
Since the start of 2016, the
currency has been even more
unpredictable, as investors and
traders began to question the
PBoC’s goals amid a slowing
economy and, therefore,
the outlook for the
renminbi.
On January 7,
the PBoC set the
fix at Rmb6.5646
to the US
dollar, the
lowest level
since March 18,
2011. While many
analysts argue the
move demonstrated the
central bank was becoming
more tolerant of a depreciating
currency, within hours of setting the
fix, the PBoC intervened to defend the
renminbi after its offshore rates hit a
record low of Rmb6.76.
To add to the confusion, the PBoC
effectively strengthened the renminbi
the next day, fixing it at Rmb6.5636 –
stronger than the prior day’s close of
Rmb6.5929, and leaving many puzzled
about what the central bank was thinking.
Following its dramatic devaluation of
the currency in August, the PBoC stated:
“the quotes of central parity…should refer
to the closing rate of the inter-bank FX
market on the previous day”.
And for a period of time, the fix adhered
to the new process. Although the PBoC
never specified how it would set the daily
fix, markets observed that from August
through December, the renminbi was
fixed within 0.02% from the previous
close.
READING THE TEA LEAVES
Since then, however, the pattern has
experienced changes. For example, the
fix of Rmb6.5636 to the dollar was 0.46%
stronger than the prior day’s close of
Rmb6.5929 on January 8.
As a result, in a single trading day,
the renminbi’s onshore/offshore spread
widened to more than 1,600 basis points.
Beijing further spooked markets when
it raised barriers on cross-border flows,
presumably out of fears that a weaker
renminibi was triggering capital flight.
On January 18, for example, China
U-turned on its well-publicised cross-
border renminbi cash pooling policy and
suspended net outflows of money from
treasury cash pools.
“[It is] this sort of ad-hoc changes that
makes it very hard for anyone to really
understand what the policy methodology
is,” said ANZ’s Goh.
Companies exposed to the renminbi
must now learn to price in FX volatility.
This is difficult, but pouring over
hedging transaction data at least offers
guidance on where the market believes
the renminbi is headed and how many are
actively hedging their exposure.
Although far from a perfect guide, the
Hong Kong Stock Exchanges and Clearing
hit a record-high open interest level of
29,352 contracts ($771 million notional)
on January 11. On January 7, the futures
saw the daily turnover hit 6,425 contracts
with a notional value of $643 million].
Besides hedging with derivatives, some
corporate treasurers are taking a more
dramatic approach and changing their
liability structures in order to mitigate
their renminbi exchange risk.
“Chinese companies will avoid foreign
currency debt due to the FX risk,” said
Alicia Garcia-Herrero, Asia-Pacific chief
economist at Natixis.
Foreign companies would also be less
incentivised to hold renminbi financial
assets, she added. ■
102.0
101.5
101.0
100.5
100.0
99.5
6.60
6.55
6.50
6.45
6.40
RMB exchange rate index RMB fix
11Dec15 4Jan16 1Feb16
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