FX Spotlight | RMB: A clarification of “stability” | Article – HSBC VisionGo

RMB: A clarification of “stability”
Finance  ·    ·  6 mins read

  • The PBOC vows to maintain the RMB’s exchange rate at “basically stable” levels
  • Cyclical developments, such as deteriorating terms of trade and smaller yield advantage, may weigh on FX inflows…
  •  …and do not argue for a significantly higher RMB NEER

The PBOC has pledged to maintain the “basic stability” of the RMB’s exchange rate at a reasonable and balanced level

On 23 May, the People’s Bank of China (PBOC) reiterated that it will maintain the exchange rate at “basically stable” levels. According to PBOC Vice Governor Liu Guoqiang in a Q&A segment posted on the PBOC’s website, the existing floating exchange regime is a suitable arrangement for China for now and “a period of time in the future” (Bloomberg, 23 May 2021).

The recent surge in commodity prices is not  fully due to demand from China, so it is debatable whether a stronger RMB is needed, in our view

This is likely to be interpreted as a clarification that there is no imminent change in China’s FX policy, after the two PBOC officials recently published articles on the RMB. Zhou Chengjun, director of the PBOC Finance Research Institute said China needs to give up an exchange rate target as the RMB goes global. He made the comments at a forum on 16 April, according to a transcript released by the forum organiser (Bloomberg, 23 May 2021). Lyu Jinzhong, director of the research and statistics department at the PBOC (Shanghai branch), said a stronger RMB is needed to tackle rising commodity prices (China Finance, 21 May 2021). 

We believe Mr. Zhou’s comments should be a reiteration of China’s long-term FX policy goal, while Mr. Lyu’s article represents a policy debate on how the exchange rate should react to external shocks. We agree with the former over the long run, and believe the latter is up for debate, given that the recent surge in commodity prices is not fully due to demand from China.

We think the cyclical developments (such as deteriorating terms of trade and smaller yield advantage) do not argue for a significantly higher RMB NEER

Over the short run, as PBOC Vice Governor Liu suggests, USD-RMB is still likely to follow the broad USD trend, as well as supply and demand dynamics. On the latter, the State Administration of Foreign Exchange (SAFE) recently released April data, showing a modest net USD purchase of USD1bn by customers in April, in comparison to an average of USD40bn of net USD selling between December 2020 and March 2021. While the drop could be exaggerated by the USD23bn increase in domestic FX deposits, it still shows a slowdown in FX inflows, which are likely due to deteriorating terms of trade (amid higher commodity and chip prices) and RMB valuation. Finally, Chinese government yields have dropped to their lowest level since last September, which is consistent with slowing sequential economic growth. These cyclical trends do not argue for a significant increase in the nominal effective exchange rate (NEER) of the RMB from here, in our view.

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