Analysts see no change in China monetary policy
Although the specter of a weakening yuan haunts global markets, the Chinese renminbi’s “cracking seven” marks no fundamental shift in the country’s exchange-rate policy and stands as the logical result of the Sino-US trade conflict, experts say.
“We think China’s renminbi policy framework is unchanged even though the timing of the US dollaryuan move above 7.00 raises eyebrows,” Shaun Roache, chief economist for Asia-Pacific at S&P Global Ratings, wrote in a report titled China’s Renminbi Moves Beyond 7. The report was published on Wednesday.
“For some time, China has allowed more flexibility versus the dollar, and higher trade policy risks mean more depreciation pressure,” Roache said.
The rating agency said it believes the currency weakness is consistent with China’s exchange-rate policy framework of the last two years or so.
The policy since 2016 has been to focus more on the stability of the currency versus the trade-weighted basket, in which the US dollar has a 27 percent weight if it includes the pegged Hong Kong dollar. The focus also is to allow market forces to play a greater role.
The obvious implication of such a policy is more volatility in the bilateral rate versus the dollar, S&P Global Ratings said.
To be sure, if last week’s market turmoil was driven by tariffs, this week it is the yuan that has been at the center of investor fears.
On Thursday, China’s central bank cut the yuan’s daily reference rate — the “trading band” it sets every day to curb how far up or down the currency’s value can move — at 7.0039 yuan per dollar. For the first time since the global financial crisis in 2008, the yuan midpoint was set weaker than 7 per dollar — a psychologically important benchmark.
This came after the weakening of the currency on Monday marked the lowest exchange rate in more than a decade and broke through what is seen as a symbolic level.
A weakening yuan is believed to be the logical result of an escalation of US trade protectionism as Washington last week threatened 10 percent tariffs on an additional $300 billion of Chinese exports.
A more flexible yuan good for both China and world
“Managed renminbi flexibility will bring bouts of market volatility, but ultimately, this is healthy,” Roache said.
A more flexible renminbi is good for China — especially to partially absorb tariffs and avoid future abrupt exchange rate change — and good for the world, he said.
Global rating agency Fitch, which rates China at A+ with a “stable” outlook, in line with both S&P Global and Moody’s, sees Monday’s fall in the yuan past the 7-per-dollar level “not meaningful from a sovereign credit prospective”.
“In fact, to the extent that moves are orderly and do not destabilize currency expectations or precipitate capital outflows, greater currency flexibility could even be viewed as positive from a credit perspective,” Andrew Fennell, a director in Fitch’s sovereign ratings arm, said in an interview with Reuters on Tuesday.
A freer-floating yuan would help preserve the country’s foreign exchange reserves and cushion some of the negative effects of US trade tariffs, Fitch pointed out.
As a flashpoint in the trade disputes between the world’s two largest economies, the Chinese renminbi has its outlook dependent mainly on trade and technology tensions with the US, S&P Global Ratings said.
China will maintain the key logic of exchange rate
“After the yuan broke above the 7-per-dollar barrier, the contest of strength will continue,” said Cheng Shi, chief economist of ICBC International. “The choice of direction for the future development of ChinaUS trade tension will deeply reshape the exchange rate movement scenario and the equilibrium level. If the tension turns into a long-term game without extremetization, the yuan may maintain long-term stability.”
As a way to mop up liquidity and support offshore yuan levels, the People’s Bank of China said on Tuesday it will sell 30 billion yuan ($4.26 billion) of offshore yuan-denominated bills in Hong Kong on Aug 14.
The issuance will include 20 billion yuan of three-month bills and 10 billion yuan of one-year bills.
Cheng believed the yuan movement framework will remain the same after it lost the important psychological anchor of 7.
“After years of practice and considering the future global environment, the People’s Bank of China will maintain the key logic of exchange rate and monetary policies,” Cheng said. “External expectation management and an internal step-up of growth stabilization efforts will work together.”
The research house said the yuan is expected to enter steady correction mode and gradually move toward a reasonable equilibrium level. An appropriate two-way fluctuation of the exchange rate will also help strengthen the growth resilience of China’s economy.
Managed renminbi flexibility will bring bouts of market volatility, but ultimately, this is healthy... A more flexible renminbi is good for China — especially to partially absorb tariffs and avoid future abrupt exchange rate change — and good for the world.’’ Shaun Roache, chief economist for Asia-Pacific at S&P Global Ratings