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RMB’s value determined by market forces

Chen Jia
Updated: May 30,2019 7:00 AM     China Daily

China would rather rely on market-oriented forces to determine the renminbi’s value than defend its currency by dipping into its $3 trillion foreign exchange reserves amid trade disagreements, analysts said.

The United States Treasury announced on May 29 that it could not label China as a “currency manipulator” after Washington monitored the recent performance of the RMB.

No evidence was found to show Chinese monetary authority intervention in foreign exchange markets over the past several months, according to the US Treasury’s semiannual foreign-exchange report to Congress.

The May report summarized that China’s growth appears to be stabilizing on the back of recently enhanced supportive measures.

The report expanded the number of countries it scrutinizes for currency manipulation to 21 from 12. Countries with a current account surplus with the US equivalent to 2 percent of GDP were put on the watch list, compared with 3 percent of GDP before.

China didn’t meet the “currency manipulator” criteria listed by the US Treasury, but Washington will continue assessing the RMB’s performance given China’s large trade surplus with the US, the report said.

The US Treasury removed India from the watch list, while it added Singapore, Malaysia and Vietnam.

“Chinese authorities have not used the exchange rate in prior easing cycles to support growth, and they are unlikely to do so now, as this could pose macroeconomic stability risk,” said Andrew Fennell, lead sovereign analyst for China at Fitch Ratings.

The world’s second-largest economy maintained its foreign exchange reserves at $3.095 trillion at the end of April. The reserve amount was stable, although it slightly retreated from $3.098 trillion at the end of March, according to the State Administration of Foreign Exchange.

Li Yang, director of the National Institution for Finance and Development of the Chinese Academy of Social Sciences, said that China is unlikely to sacrifice foreign exchange reserves to defend its currency, even if depreciation pressure rises amid any escalation in trade tension.

In May, the offshore RMB exchange rate against the US dollar dropped more than 3 percent under market pressure as global investors worried about the escalation of trade friction.

Guo Shuqing, Party secretary of the People’s Bank of China, the central bank, said on May 27 that higher US tariffs on China’s imports triggered financial market volatility, and this also affected the offshore RMB.

The currency’s depreciation was purely caused by market forces, and China has never taken any measures to deliberately devalue the currency to make its exports more attractive, said Guo, who is also head of the China Banking and Insurance Regulatory Commission.

According to Guo, the short-term fluctuation of the RMB exchange rate was normal, and the depreciation will not last long given the stable economic growth base.

“Any speculative activities to short the RMB will suffer huge losses,” he warned.

The RMB’s daily trading reference, or the central parity for onshore trading, has been stabilized around 6.89 per dollar for eight days from May 20, and market watchers said market-oriented depreciation pressure was losing steam.

Yi Gang, the central bank governor, has said several times that the PBOC has ceased direct intervention in foreign exchange markets, and the performance of RMB is addressed mainly by market forces.