Central bank officials expressed full confidence on July 3 in maintaining a stable and reasonable exchange rate for the yuan against the backdrop of escalating China-US trade friction and a strong US dollar.
The yuan weakened to its lowest level against the dollar this year, with the onshore spot trading price falling to 6.7167 in the morning before rebounding to 6.6492 by 5 pm. It has weakened by 2.4 percent against the dollar since the beginning of this year.
People’s Bank of China Governor Yi Gang said in an interview with the China Securities Journal, posted on the bank’s website, that China will keep the yuan’s exchange rate “basically stable” at a reasonable level and continually deepen the market-oriented exchange rate reform, as the country’s financial risks are largely controllable under a sound economic outlook.
The country’s managed floating exchange rate regime is unchanged, and “we must stick to it”, Yi said. He said that the bank is closely watching the foreign exchange market’s recent fluctuations due to a strengthening dollar and external uncertainties.
The State Council said in a statement on July 3 that Vice-Premier Liu He heads its newly seated Financial Stability and Development Committee.
The committee held its first meeting on July 2 and reviewed the country’s three-year action plan to prevent and resolve major risks.
It also studied key tasks, including pushing financial reform and opening-up, maintaining a prudent and neutral monetary policy, keeping financial market liquidity “reasonably ample”, and effectively managing the pace and intensity of financial regulation.
Pan Gongsheng, director of the State Administration of Foreign Exchange and a central bank deputy governor, stressed at a forum in Hong Kong on July 3 that China is “confident in maintaining the renminbi basically stable” at a reasonable level.
The central bank officials’ comments, analysts said, helped quell concerns and stabilize market sentiment as both onshore and offshore traded yuan strengthened after their remarks were reported. In the first quarter, the yuan strengthened rapidly, followed by a turnaround beginning in mid-April. It sharply depreciated by 3.3 percent in June, the largest monthly drop ever.
“As the second half kicks off, the yuan is likely to remain impacted by a combination of domestic and external factors,” said Lukman Otunuga, an analyst at FXTM, a forex broker. “But it remains too early to assume that yuan weakness remains a recurrent theme.”
It is highly unlikely that China is using yuan depreciation as a tool in trade negotiations with the US, said Tai Hui, chief market strategist of JP Morgan Asset Management (Asia Pacific).
The yuan’s weakening has reflected the narrowing spreads between interest rates of China and the US, and an overly depreciated yuan will bring no benefit, Tai said.