China central bank likely to focus on stabilizing market confidence

96
3
China central bank likely to focus on stabilizing market confidence

The central bank, the People's Bank of China PBOC, is the headquarters of the People's Bank of China. PHOTO IC China's central bank is expected to prioritize stabilizing market confidence in the coming quarter, keeping monetary policy accommodative for economic recovery while fending off a weakening of the renminbi against the dollar, experts said on Thursday.

Their comments came after aggressive monetary tightening in the United States sent the dollar index to a two-decade high and deflated nondollar currencies worldwide, including the renminbi.

After hitting 7.25 on Wednesday, its lowest level in 14 years, the onshore exchange rate of the renminbi recovered to 7.14 against the dollar on Thursday afternoon, still shedding about 12 percent since the beginning of the year.

The People's Bank of China, the country's central bank, declared on Wednesday it was committed to defending renminbi stability as the first-order requirement for the foreign exchange market.

After its quarterly monetary policy meeting, the central bank vowed on Thursday to manage expectations regarding the renminbi exchange rate, while reiterating its focus on stabilizing the macroeconomic situation by providing more substantial support for the real economy.

Experts said that a weakening renminbi means that the central bank should perform a balancing act between lowering domestic interest rate levels to balance economic growth and preventing such moves from lowering the yields of renminbi assets and intensifying the depreciation pressure.

The PBOC has room for amplifying support for China's economy thanks to the stability of the renminbi against a basket of major currencies, they said, adding that solid economic momentum is the fundamental anchor of foreign exchange market expectations.

Shao Yu, chief economist at Orient Securities, said the central bank still has room for further easing, given the fact that the renminbi remains strong compared with major non-dollar currencies by registering smaller losses against the dollar.

Experts said that the PBOC has to decide whether or not to implement forceful measures to stop the depreciation of the renminbi against the dollar due to the strength of the renminbi. They said that such moves would make the renminbi appreciate against nondollar currencies and hurt China's competitive edge on exports.

The experts said that the PBOC may focus on avoiding any rapid weakening of the renminbi against the dollar or constant one-way renminbi movements, which could shake market confidence.

In Wednesday's statement, the central bank warned of the possibility of one-way renminbi movements, which will cause losses over time. It was made more expensive to short the renminbi after the PBOC raised the risk reserve requirement on currency forward trading from zero to 20 percent on Monday.

Ye Yindan, a researcher at the Bank of China Research Institute, said there was limited room for the renminbi to depreciate against the dollar, due to a potential pickup in China's economic growth, which may increase to 5 percent year-on-year in the fourth quarter, from around 3.8 percent in the previous quarter.

The country's current account surplus is up 43 percent year-on-year, with the robust condition of China's balance of international payments to provide fundamental support for the renminbi, with the country's balance of international payments hitting $166.4 billion in the first half, up 43 percent year-on-year, the State Administration of Foreign Exchange said on Thursday.