Wide range of options open to PBOC, depending on market participants
The central bank is determined to keep the RMB’s exchange rate stable against a basket of major currencies as part of China’s post-pandemic recovery, economists say.
They expressed this view as the appreciation of the RMB against the US dollar, resulting from China’s rapid economic recovery and impressive exports, falters, especially after the monetary authority curbed speculation. market by removing liquidity from foreign exchange reserves.
On Thursday, the RMB’s peg rate against the dollar stood at 6.4298, after a national forex market self-discipline mechanism suggested companies take a neutral stance on currency risk management , because the appreciation and depreciation of the currency are possible. The RMB peaked at 6.3572 per dollar on June 1, its highest level since May 2018.
In April and last month, the RMB appreciated more than 3% against the dollar and nearly 1.4% against a basket of currencies tracked by the CFETS index, a pace that fueled the concern of the monetary authorities. CFETS refers to China’s currency exchange system.
Market participants have said that the People’s Bank of China, the country’s central bank, has various tools it can use to keep the exchange rate stable. On Tuesday, the bank decided to increase the reserve requirement rate on foreign currency deposits in financial institutions, a rare move since the global financial crisis of 2008. This move is expected to reduce the supply of foreign currency in the market.
Zhang Ming, deputy director of the Institute of Finance and Banking of the Chinese Academy of Social Sciences, or CASS, said other measures are available to the PBOC if the RMB faces continued pressure from appreciation or depreciation.
The measures include open market operations using foreign exchange reserves and resetting the so-called countercyclical factor, the adjustment that contributing banks make to the daily trade-weighted benchmark rate that the central bank uses to guide the RMB.
On June 2, China’s foreign exchange regulator, State Administration of Foreign Exchange, or SAFE, issued a new quota of $ 10.3 billion under the Qualified Domestic Institutional Investor, or QDII, program, allowing 17 Chinese institutional investors to buy more financial instruments abroad.
Analysts said the watchdog made the decision to balance cross-border investment, thereby allowing more capital outflows and easing RMB appreciation pressure.
Guan Tao, chief global economist at BOC International and also a former head of SAFE, said the QDII quota was the biggest one-time problem in a single month and showed that the authorities are determined to keep the RMB exchange rate at a “reasonable balance”. .
“We expect the central bank and SAFE to take a series of further steps to achieve balanced cross-border capital flows. These steps could focus on opening up the capital account and the financial market, especially the markets. stocks, bonds and forex, ”Guan said. .
Lu Ting, chief economist for China at Nomura Securities, said if these measures were not as effective, the central bank could formulate its own policy measures in the coming months.
Analysts said the monetary authority should avoid any action aimed at interfering with or manipulating the forex market, as this would be contrary to market principles and international practice.
Global financial organizations, such as the International Monetary Fund, have regularly confirmed that China does not manipulate the RMB exchange rate.
Iris Pang, chief economist for China at Dutch bank ING, said: “The PBOC is sticking to the idea of liberalizing exchange rates.
She said central bank actions, such as increasing the reserve requirement rate for foreign deposits, are a way of deterring speculation, while ensuring that the market operates normally.