A new era of international acceptance of the renminbi will begin when onshore trading of the currency resumes on Monday after a nine-day break when offshore rates neared six-year lows.
Last week's weakness has pushed the gap between the two rates to a three-month high — something Beijing has been trying to minimise as it seeks to curb capital outflow pressures. A sharply weaker offshore rate sends a signal that international investors are betting on currency weakness and risks triggering renewed capital flight.
Speculation of renewed weakness has grown since China was officially included as a reserve currency alongside the dollar, euro, sterling and the yen by the International Monetary Fund on October 1. Beijing had been keen to limit swings in its currency leading up to that point, but strategists have suggested it could tolerate further weakness now it has succeeded.
Reserves data imply the People's Bank of China spent about $27bn last month in supporting the renminbi, according to analysts, as its total foreign exchange holdings dropped $18bn — more than expected — to $3.17tn, their lowest level in more than five years.
"The renminbi has held fairly steady against the dollar in recent months. But, as [the] data highlight, this is only because the PBoC has continued to intervene heavily in the FX markets in response to still large capital outflows," said Julian Evans-Pritchard, China economist at Capital Economics. "Looking ahead, we think the risks to the currency remain on the downside."
On Friday the offshore renminbi slipped to a low of Rmb6.7174 against the dollar, matching levels not seen since January's turmoil on China's currency and equity markets. The onshore rate closed at Rmb6.6718 ahead of China's long Golden Week holiday.
The currency has fallen almost 7.5 per cent against the dollar since the PBoC reformed its management of the currency last year. Since the turmoil in January this year, investors have largely accepted that China's new system does more closely reflect global market direction.
The changes have also largely appeased critics of Beijing's previous currency actions as concern shifts instead to the rapid debt build-up in the world's second-largest economy.
Speaking at last week's IMF and World Bank meetings in Washington, PBoC governor Zhou Xiaochuan acknowledged the criticism, promising that Beijing will move to "exert control over credit growth".
Mr Zhou also said in Washington that Beijing would continue to "improve exchange rate flexibility while maintaining exchange rate stability" — an increasingly contradictory mandate.
"Under a [fully] market-determined exchange rate, the [renminbi] would be weaker against the US dollar than it is now," said Bill Adams, senior international economist at PNC, which predicts that the current system will cushion the renminbi's fall, holding it to 6.9 against the dollar by January and 7.1 per cent by the end of 2017.
Earlier this year, Beijing's foreign currency stockpile was declining by as much as $100bn a month. At the time, government officials said privately that they would welcome a $1tn decline in the reserves as Chinese companies paid down dollar-denominated debt and also snapped up overseas assets at an unprecedented rate
The officials also maintained that they would be comfortable with a $2tn forex cushion — which would still be by far the world's largest — but continue to insist that there is "no basis" for a prolonged slide of the renminbi against the dollar.
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