Sta­bil­ity Should Be the Fo­cus of Ex­change Rate Pol­icy

Beijing Review - - BUSINESS MARKET WATCH - This is an edited ex­cerpt of an ar­ti­cle by com­men­ta­tor Zhang Mo, pub­lished in Eco­nomic In­for­ma­tion Daily Copy­edited by Craig Crowther Com­ments to [email protected]­view.com

In a re­port on mon­e­tary pol­icy im­ple­men­ta­tion in the third quar­ter of 2018, China’s cen­tral bank made its lat­est state­ment on the ren­minbi ex­change rate pol­icy. Ac­cord­ing to the re­port, it will deepen mar­ket-ori­ented re­form of the ex­change rate and im­prove the man­aged float­ing ex­change rate sys­tem based on mar­ket sup­ply and de­mand and ad­justed in ac­cor­dance with the bas­ket of ma­jor cur­ren­cies. It will also en­hance the two-way float­ing flex­i­bil­ity of the ren­minbi ex­change rate and strengthen pru­den­tial su­per­vi­sion to main­tain its sta­bil­ity when nec­es­sary. It is hoped that this will main­tain the ex­change rate at a rea­son­able and bal­anced level across the board, with a view to sta­bi­lize the ren­minbi ex­change rate in case of over­shoot­ing.

China’s ex­change rate regime is based on mar­ket sup­ply and de­mand and is care­fully man­aged. In the cur­rent mar­ket, over­shoot­ing may trig­ger sharp changes in mar­ket sen­ti­ment, which could ex­ert se­vere neg­a­tive im­pacts on the fi­nan­cial sys­tem and even the wider Chi­nese econ­omy.

Since the ex­change rate re­form launched on Au­gust 11, 2015, mar­ket en­ti­ties have be­come more ra­tional to­ward the ex­change rate and the mar­ket’s neg­a­tive ex­pec­ta­tion of de­pre­ci­a­tion has been eased along with the fluc­tu­a­tion of the ren­minbi ex­change rate. How­ever, it is clear that con­cerns sur­round­ing the ren­minbi have not fully abated. Against the back­drop of the con­tin­u­ously strength­en­ing U.S. dol­lar, Sino-u.s. trade fric­tions and down­ward pres­sure on China’s econ­omy, ex­pec­ta­tion of de­pre­ci­a­tion has re­bounded promi­nently as the yuan ap­proaches seven per dol­lar.

Ac­cord­ing to the lat­est data re­leased by the State Ad­min­is­tra­tion of For­eign Ex­change, China’s banks saw the for­eign ex­change set­tle­ment deficit nar­row by more than 80 per­cent in Oc­to­ber month on month. The for­eign ex­change mar­ket showed bal­anced sup­ply and de­mand over­all. How­ever, mar­ket sen­ti­ment still re­mains volatile and the clos­ing price of the ren­minbi against the U.S. dol­lar on sev­eral trad­ing days was be­low the cen­tral par­ity rate.

Many mar­ket par­tic­i­pants be­lieve that once the ex­change rate falls be­low seven, a sharp ad­just­ment in mar­ket sen­ti­ment may oc­cur, trig­ger­ing an over­shoot of the for­eign ex­change mar­ket and caus­ing ir­re­versible im­pacts on the fi­nan­cial sys­tem and eco­nomic fun­da­men­tals. Un­der cur­rent cir­cum­stances, it is nec­es­sary for the cen­tral bank to en­hance macro pru­den­tial man­age­ment in or­der to avoid se­vere con­se­quences.

The bank has al­ready adopted sev­eral tar­geted mea­sures, in­clud­ing strength­en­ing com­mu­ni­ca­tion with the mar­ket and im­ple­ment­ing poli­cies to avert risks. Based on their judg­ment of mar­ket con­di­tions, banks re­leas­ing the cen­tral par­ity rate of the yuan against the U.S. dol­lar have rein­tro­duced coun­ter­cycli­cal fac­tors.

The cen­tral bank has twice is­sued bills worth 10 bil­lion yuan ($1.4 bil­lion), launch­ing in­ter­est rate bid­ding through the Cen­tral Money­mar­kets Unit bond ten­der­ing plat­form of the Hong Kong Mon­e­tary Au­thor­ity to ad­just ren­minbi liq­uid­ity in the off­shore mar­ket.

To sta­bi­lize the ex­change rate does not nec­es­sar­ily mean stop­ping mar­ket-ori­ented re­form of the ex­change rate regime. The goal is the medium- and long-term sta­bil­ity of the ren­minbi ex­change rate. In fact, push­ing ahead with the mar­ket-ori­ented re­form and al­low­ing the ex­change rate of the yuan to fluc­tu­ate with more flex­i­bil­ity can ef­fec­tively ease the mar­ket’s neg­a­tive ex­pec­ta­tion of de­pre­ci­a­tion gen­er­ated by ex­change rate fluc­tu­a­tions. There­fore, mar­ket en­ti­ties need to keep a ra­tional at­ti­tude to­ward the fluc­tu­a­tions and main­tain a sta­ble men­tal­ity to con­sol­i­date the foun­da­tion of long-term sta­bil­ity.

A cus­tomer con­ducts trans­ac­tions at a smart bank in Wuzhen, Zhe­jiang Prov­ince, on Novem­ber 9

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