The Chinese currency kept its position as the world’s fifth most active currency for domestic and international payments in June, despite its short-term weakening against a stronger US dollar, according to a monthly tracker from a global financial information platform.
The continual reform toward a more market-based and flexible foreign exchange regime, along with further opening-up of China’s financial sector, is expected to improve the renminbi’s international usage, said experts, as the renminbi’s exchange rate will float closely around the equilibrium level.
Last month, the renminbi accounted for 1.81 percent of world currency payments by value, slightly down from 1.88 percent in May, but still maintained the fifth place, according to the Society for Worldwide Interbank Financial Telecommunications (SWIFT). It bounced back to this position since May from sixth in April with a share of 1.66 percent.
The renminbi’s central parity exchange rate, or the daily fixing, strengthened to 6.7662 per dollar from 6.8040 on July 26, the largest jump in three weeks, according to the central bank.
It followed a remarkable appreciation in the offshore market on July 25, when its spot trading price once jumped by more than 500 points, according to the China Foreign Exchange Trade System.
“Currently, the renminbi exchange rate is generally following the market-oriented floating rule, with very limited policy intervention,” said Guo Jiayi, an analyst with Industrial Bank.
“The renminbi exchange rate is partially qualified for free float right now. And we expect it to generally achieve free float by 2020,” said Guo.
According to the International Monetary Fund’s 2018 External Sector Report, which was issued on July 24, the renminbi’s exchange rate was broadly in line with fundamentals and desirable policies, while the external position was moderately stronger.
The further opening of the capital account in China is likely to create substantially larger two-way cross-border capital flows and more flexible currency exchange rates, said the IMF, given the positive net direct investment inflows and stable foreign direct investment inflows in 2017.
“Continuing the move toward a more market-based and transparent monetary policy framework is a key element in ensuring an orderly transition to an effective float, which may also require use of foreign exchange reserves to smooth excessive volatility,” suggested the IMF, proving that China’s foreign exchange reserves are sufficient.
Meanwhile, the fund said that the US dollar’s value has been overestimated by 8 to 16 percent, which is expected as one of the reasons in the near term that could aggravate trade tensions and result in faster tightening of global financing conditions. It could prove even more disruptive for emerging markets, especially those with weak external positions, according to the IMF report.