27 October 2016
Zhou Xiaochuan has tried to ease the concerns of the market regarding the renminbi exchange rate. Photo: Xinhua
Zhou Xiaochuan has tried to ease the concerns of the market regarding the renminbi exchange rate. Photo: Xinhua

PBoC jawboning on exchange rate should calm market

Faced with concern in the market about the renminbi exchange rate, People’s Bank of China governor Zhou Xiaochuan expressed his views in an interview with mainland media.

They were the first comments on the issue from a top official since the system determining the renminbi exchange rate was reformed in August, sparking an initial devaluation of nearly 3 percent.

The currency weakened sharply again at the beginning of this year.

Zhou’s remarks show that the central bank is trying to relieve the market’s worries and better manage the expectations for the trend in the renminbi exchange rate. 

He stressed that there’s no intention to devalue the renminbi significantly.

Zhou said:

* China doesn’t intend to stimulate trade by devaluing the renminbi or to trigger a currency war. Last year, the country’s trade surplus climbed to a record US$598 billion, and the Consumer Price Index is at the low level of 1.4 percent.

* He regards the slowdown in Chinese economic growth as a normal process. China’s current account is stable, its international competitiveness remains strong, capital flows are within a reasonable range, and the renminbi will be stable against a trade-weighted basket of currencies. The renminbi is expected to be stable in the medium to long term.

* Instead of a peg to the US dollar, China is now using a currency basket to price the renminbi. When an intervention is necessary, macroeconomic targets will be considered in making the decision. The PBoC doesn’t have an economic model to estimate the best exchange rate.

* China will not allow speculators to dominate the market and will continue preventing capital flight. The country has the largest pool of foreign reserves in the world and is able to keep its financial markets stable. The PBoC is promoting the renminbi as a global reserve currency. That will optimize the structure of global reserves and strengthen the world’s financial stability.

* China will choose the proper time for currency reform, minimizing the negative impacts that may spill over to other markets.

Zhou’s words will help strengthen the market’s confidence in the renminbi.

On the first trading day after the Lunar New Year holidays, the renminbi strengthened 1.14 percent against the US dollar.

In the coming month, the renminbi/US dollar rate will likely be stable.

We maintain our forecast that the rate will reach 6.8 by the end of this year.

We expect China to tighten capital controls.

The country needs to balance renminbi exchange rate stability against low interest rates and the opening up of the capital market. These cannot be achieved at the same time.

China has chosen the first two targets.

By the end of this year, the country’s foreign reserves will be in the US$2.8 trillion-US$3 trillion range.

We expect capital control measures to ease after pressure on the exchange rate is relieved, likely next year.

This article appeared in the Hong Kong Economic Journal on Feb. 23.

Translation by Myssie You

[Chinese version 中文版]

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