China cites ‘flexible’ yuan exchange rate, healthy economy as buffer against US tapering
- Currency regulator says China’s economic fundamentals, including ‘improving flexibility’ of the yuan exchange rate, mean impact of US tapering controllable
- Comments reinforce market expectations Beijing is less willing to intervene in the foreign exchange market, allowing for greater volatility
The assurance from China’s State Administration of Foreign Exchange (SAFE) comes as the Federal Reserve inches closer to reducing monthly asset purchases and, possibly in 2023, raising interest rates.
“We have accumulated a lot of experience and policy tools, and have taken many pre-emptive actions this year,” said Pan Gongsheng, administrator of SAFE and deputy-governor of the People’s Bank of China (PBOC), at the Financial Street Forum in Beijing on Wednesday.
“The yuan exchange rate will be basically stable at a level of equilibrium … as its flexibility improves, it can play a better role in self-adjustment.”
His comments reinforced market expectations the central government will be less willing to directly intervene in the foreign exchange market, allowing for greater volatility.
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Pan attributed stress on the yuan to one-way appreciation between 2005 and 2014 and the rise of the US dollar index against rival currencies, but said he saw less of such pressures this time.
“In the current round of policy tightening, the gap between the US and other economies is apparently smaller in terms of growth and monetary policy. This will affect the room of US dollar appreciation,” he said.
The US dollar index has increased 0.7 per cent to 93.56 since mid-August, when market expectations of US tapering began to grow.
The yuan has turned more volatile in the past two years. It fell below 7 yuan per dollar at the end of 2019, but bounced back to 6.3572 yuan per dollar in June.
On Thursday, the daily midpoint reference for the yuan was set by the central bank at a four-month high of 6.3890.
The yuan is allowed to rise or fall by 2 per cent on either side of the daily parity, which the PBOC often uses to signal to the market its stance for the currency.
However, “from a medium and long-term perspective, the yuan is unlikely to have persistent appreciation,” it wrote in a note on Tuesday.
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It has also enhanced macroprudential assessment of cross-border capital flows and is keeping a close eye on foreign exchange transactions.
The world’s second largest economy remains an investment hotspot after it successfully contained the initial coronavirus outbreak and the industrial sector quickly recovered its role as the globe’s main producer of consumer goods.
China attracted US$110.8 billion of foreign direct investment in the first 10 months of this year, up 2.9 per cent from a year earlier.
Meanwhile, foreign investors raised their holdings of Chinese bonds for 34 straight months over the same period by 88 billion yuan (US$13.7 billion) to 3.47 trillion yuan last month.
