China Defends New Currency Regime
Jamil Anderlini in Beijing
Financial Times
China’s central bank has publicly defended its currency policy and assured jittery global markets that it does not want to see a collapse in the value of the renminbi following Tuesday’s shock devaluation.
In a hastily called and extremely rare press conference on Thursday, top officials from the People’s Bank of China acknowledged they were intervening in the market and said they saw no basis for further dramatic devaluation after the central bank this week engineered the biggest fall in the Chinese currency since the mid-1990s.
“From the international and domestic economic and financial situation, we can see that there is no basis right now for continued depreciation of the renminbi exchange rate,” said Zhang Xiaohui, assistant governor of the PBoC. “The central bank has the power to maintain basic stability in the Rmb and ensure it remains at a reasonable and balanced level.”
The renminbi weakened 1 per cent in early trading on Thursday, but the loss was halved following the PBoC conference.
The currency has fallen 3.3 per cent against the US dollar over the three days since the PBoC’s surprise announcement that it was moving to a more “market-based” onshore foreign exchange regime.
That is more than the renminbi has moved in either direction over the course of most years since Beijing dropped an explicit peg to the US dollar in 2005 and switched to the current “managed floating exchange rate regime”.
On Thursday, Yi Gang, deputy PBoC governor, said the central bank would continue to step into the market to guide the currency to an appropriate level when it felt it was becoming “too volatile”.
“This kind of managed exchange rate system is appropriate for China’s national conditions,” Mr Yi said. “When market fluctuations are too big, we can carry out effective management to provide the market with more confidence towards the exchange rate system and ensure greater stability in the market and the functioning of the economy.”
The central bank has tried to present Tuesday’s decision to allow the currency to depreciate as a move to a more market-orientated and freely floating exchange rate rather than an intentional devaluation, which could prompt other countries to follow suit.
But Beijing is trying to walk a delicate line between allowing market forces to set the exchange rate and “guiding” the rate to a level China’s leaders think is ideal to boost exports and prop up flagging domestic growth.
Depending on who you ask, China’s move to let its currency depreciate is either a milestone for market reform or a sharp escalation of a currency war waged by government planners desperate to rescue a sputtering economy. China’s central bank has done its best to support the first interpretation.
On Wednesday, just one day after saying the market would play the main role in setting the exchange rate, the PBoC heavily intervened just before the end of the trading session by selling dollars and buying renminbi to ensure the Chinese currency did not fall by too much.
Traders told the Financial Times that the PBoC continued to sell dollars on Thursday to stop the renminbi from falling much further.
Chinese media also reported on Thursday that the central bank had instructed banks not to allow any large foreign exchange purchases by their clients.
“When necessary, the PBoC is fully capable of stabilising the market exchange rate by means of direct intervention in the foreign exchange market, in order to prevent the irrational fluctuation of the exchange rate caused by herd behaviour,” Ma Jun, the PBoC’s chief economist, said in a statement sent to the Financial Times on Wednesday night.
Mr Ma said that with $3.7tn in foreign exchange reserves, the world’s biggest, the PBoC’s “ability to stabilise the exchange rate in the short and medium term far, far exceeds that of most emerging market economies”.
Until this week, the central bank had set a daily fixing rate, from which the currency could move by up to 2 per cent in either direction in a trading day, that bore no relation to the closing spot price on the previous day and was more of a reflection of where China’s leaders thought the currency should be set.
In its announcement on Tuesday, the PBoC said it would henceforth instruct market makers to “refer to the closing rate of the interbank foreign exchange market on the previous day, in conjunction with demand and supply condition in the foreign exchange market and exchange rate movement of the major currencies”.
But even after Tuesday’s supposedly market-based reform, it remains unclear exactly how the central bank decides the daily fixing rate.
When pushed by the FT to explain how the new market-based fixing worked, Mr Yi refused to say exactly how many market makers there were, whether the central bank decided the daily fixing rate based solely on the quotes from market makers or whether the market makers were free to quote any rate they liked.
He did say there were “between 10 and 20” banks, some of which were international, that acted as market makers and that the daily fixing rate was an average of the quotes they sent to the PBoC each morning, once outlying quotes were discarded.
Additional reporting by Gabriel Wildau and Patrick McGee
Financial Times
China’s central bank has publicly defended its currency policy and assured jittery global markets that it does not want to see a collapse in the value of the renminbi following Tuesday’s shock devaluation.
In a hastily called and extremely rare press conference on Thursday, top officials from the People’s Bank of China acknowledged they were intervening in the market and said they saw no basis for further dramatic devaluation after the central bank this week engineered the biggest fall in the Chinese currency since the mid-1990s.
“From the international and domestic economic and financial situation, we can see that there is no basis right now for continued depreciation of the renminbi exchange rate,” said Zhang Xiaohui, assistant governor of the PBoC. “The central bank has the power to maintain basic stability in the Rmb and ensure it remains at a reasonable and balanced level.”
The renminbi weakened 1 per cent in early trading on Thursday, but the loss was halved following the PBoC conference.
The currency has fallen 3.3 per cent against the US dollar over the three days since the PBoC’s surprise announcement that it was moving to a more “market-based” onshore foreign exchange regime.
That is more than the renminbi has moved in either direction over the course of most years since Beijing dropped an explicit peg to the US dollar in 2005 and switched to the current “managed floating exchange rate regime”.
On Thursday, Yi Gang, deputy PBoC governor, said the central bank would continue to step into the market to guide the currency to an appropriate level when it felt it was becoming “too volatile”.
“This kind of managed exchange rate system is appropriate for China’s national conditions,” Mr Yi said. “When market fluctuations are too big, we can carry out effective management to provide the market with more confidence towards the exchange rate system and ensure greater stability in the market and the functioning of the economy.”
The central bank has tried to present Tuesday’s decision to allow the currency to depreciate as a move to a more market-orientated and freely floating exchange rate rather than an intentional devaluation, which could prompt other countries to follow suit.
But Beijing is trying to walk a delicate line between allowing market forces to set the exchange rate and “guiding” the rate to a level China’s leaders think is ideal to boost exports and prop up flagging domestic growth.
Depending on who you ask, China’s move to let its currency depreciate is either a milestone for market reform or a sharp escalation of a currency war waged by government planners desperate to rescue a sputtering economy. China’s central bank has done its best to support the first interpretation.
On Wednesday, just one day after saying the market would play the main role in setting the exchange rate, the PBoC heavily intervened just before the end of the trading session by selling dollars and buying renminbi to ensure the Chinese currency did not fall by too much.
Traders told the Financial Times that the PBoC continued to sell dollars on Thursday to stop the renminbi from falling much further.
Chinese media also reported on Thursday that the central bank had instructed banks not to allow any large foreign exchange purchases by their clients.
“When necessary, the PBoC is fully capable of stabilising the market exchange rate by means of direct intervention in the foreign exchange market, in order to prevent the irrational fluctuation of the exchange rate caused by herd behaviour,” Ma Jun, the PBoC’s chief economist, said in a statement sent to the Financial Times on Wednesday night.
Mr Ma said that with $3.7tn in foreign exchange reserves, the world’s biggest, the PBoC’s “ability to stabilise the exchange rate in the short and medium term far, far exceeds that of most emerging market economies”.
Until this week, the central bank had set a daily fixing rate, from which the currency could move by up to 2 per cent in either direction in a trading day, that bore no relation to the closing spot price on the previous day and was more of a reflection of where China’s leaders thought the currency should be set.
In its announcement on Tuesday, the PBoC said it would henceforth instruct market makers to “refer to the closing rate of the interbank foreign exchange market on the previous day, in conjunction with demand and supply condition in the foreign exchange market and exchange rate movement of the major currencies”.
But even after Tuesday’s supposedly market-based reform, it remains unclear exactly how the central bank decides the daily fixing rate.
When pushed by the FT to explain how the new market-based fixing worked, Mr Yi refused to say exactly how many market makers there were, whether the central bank decided the daily fixing rate based solely on the quotes from market makers or whether the market makers were free to quote any rate they liked.
He did say there were “between 10 and 20” banks, some of which were international, that acted as market makers and that the daily fixing rate was an average of the quotes they sent to the PBoC each morning, once outlying quotes were discarded.
Additional reporting by Gabriel Wildau and Patrick McGee
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