China’s new central bank policy reaps benefits
The Chinese renminbi, also strengthened against the US dollar on Monday, after the new central bank policy to prevent illogical selling in the foreign exchange market. Analysts said the devaluation pressures were expected to fall in the near term.
The benchmark daily interest rate in the renminbi rose to 6.8508 against the dollar on Monday, up from 6.8710 on Friday. The currency was allowed to trade up or down by 2 percent around the reference price, or central parity.
The rebound came after an announcement on the central bank’s website late on Friday. He said the country had resumed a “counter-cyclical” factor in the foreign exchange system since August, to hedge the market’s irrational sentiment towards the weaker yuan.
The market took immediate steps after the news on Friday, which was indicated by the rapid rise in the spot price in both domestic and foreign markets, as confidence was strengthened to maintain the stable renminbi.
“Based on the assessment of the market situation, banks, as market makers to introduce the yuan’s central exchange rate against the dollar, the regime has adjusted the system,” according to the central bank statement.
The counter-cyclical factor is expected to help stabilize the yuan at a reasonable and balanced level in the future, according to the People’s Bank of China, the central bank, in the statement.
Xie Yaxuan, an analyst at China Merchants Securities, said the move is likely to ease the renminbi’s depreciation to some extent.
“The effective exchange rate index, against a basket of major currencies, could return to about 94.7, if the anti-cyclical factor begins to take effect,” Xie said. The index was 92.33 on August 1, a record low since its first launch in November 2015. It peaked at 98.11 on June 19th.
The renminbi weakened by almost 6% against the US dollar during the past three months, and the market is concerned that it may lead to capital outflows if the pressure of decline rises.
“It has shown that the central bank has enough political tools to maintain a relatively stable exchange rate at equilibrium level,” said Zhang Yu, an economist at Hu Shuang Securities.
She predicted that other moves would be possible if the currency fell from a “psychological threshold” of $ 7 per dollar, and the current renminbi could remove the pressure of capital outflows.
In May 2017, an “anti-cyclical factor” was introduced for the first time to the current pricing model of the yuan daily exchange rate, with the aim of moderate fluctuations of irrational volatility in the foreign exchange market.
It was suspended in January, when the yuan rose against the dollar and cross-border capital flows showed stable trends.
The central bank also said on Friday that the current economic fundamentals are stable and that economic restructuring has been pushed forward, with the growth of transaction models accelerating.