Market fluctuations will not prevent the renminbi from becoming more free-floating, especially as major economic indicators point to it having strong foundations which will dismiss depreciation speculation in the second half this year, said a leading financial expert.
The renminbi exchange rate is approaching “clean floating”－an exchange rate regime without any government intervention and an exchange rate determined by market demand and supply, Huang Yiping, deputy head of the National School of Development at Peking University, and also a former member of the central bank’s monetary policy committee, told China Daily in an interview on July 16.
The notable depreciation of the renminbi, especially since mid-June, was driven by changes in the external environment and market sentiment, instead of “substantial or sudden” changes to the economic foundations, according to Huang. “The market is expected to be more accommodative as the exchange rate gets more flexible.”
“We have accumulated abundant experience after weathering the storm, and the renminbi’s exchange rate will remain at a reasonable and stable level,” said Huang.
“The central bank has adequate policy tools to deal with any exchange rate vulnerabilities,” Huang said.
His confidence was based on relatively balanced cross-border capital flows and international balance of payments, as well as a sufficient foreign exchange reserve — $3.11 trillion by the end of June.
Wang Yiming, vice-president of the Development Research Center of the State Council, expressed similar opinions at the 2018 International Monetary Forum hosted by Renmin University of China on July 14.
He expected the dollar’s appreciation may continue as its key economic indicators showed strong momentum. “That will lead to a large impact on emerging economies including currency depreciation.”
In the second half, Wang said, one of the crucial factors influencing the renminbi is whether Sino-US trade friction will further escalate.
“So far, the market panic after June’s renminbi depreciation has almost abated, and the Chinese currency is able to remain stable.”
In the first half of this year, the renminbi depreciated 1.7 percent against the US dollar to 6.6246 by the end of June. It fell notably against the dollar especially after mid-June, as the exchange rate dropped 3.5 percent within two weeks since June 14.
The recent accelerated depreciation has offset the earlier appreciation, when the renminbi hit a strong point of 6.2882 per dollar in terms of the central parity rate, or the daily trading reference, on Feb 7. At that time, the currency appreciated by 3.91 percent since the end of 2017.
The exchange rate fluctuation, as Huang explained, reflected market sentiment as the global trade environment has deteriorated.
“In that situation, shifts in international capital flows and investor’s rising risk-aversion sentiment have resulted in turbulence in both the stock and foreign exchange markets,” he said.
In comparison, the US dollar index that measures the greenback against a basket of peers boosted by 2.44 percent in the first six months of this year after depreciating during 2017.
The US Federal Reserve, according to its half-year monetary policy report released last week, attributed the strengthening of the dollar to some factors including moderating growth in some foreign economies, combined with continued output strength and ongoing policy tightening in the US, downside risks stemming from political developments in Europe and several emerging market economies, and the recent developments in trade policy.