China’s yuan: central bank to boost flexibility of exchange rate to handle ‘shocks’ from overseas monetary policy
- The People’s Bank of China has vowed to ‘appropriately handle shocks’ from monetary adjustments in advanced economies
- China’s central bank says it will increase the flexibility of the yuan exchange rate and prioritise stability and domestic needs
China’s central bank pledged on Friday to increase flexibility of the yuan exchange rate and monitor possible shocks caused by overseas monetary tightening and a deteriorating global economy.
The rally of the yuan over the past several weeks has buoyed confidence in the country’s economic prospects after a chaotic end to 2022.
Beijing has also dealt with spillover shocks from aggressive US rate hikes last year by emphasising on domestic economic priorities.
Xuan Changneng, deputy head of the People’s Bank of China (PBOC), said the central bank would “appropriately handle shocks” emanating from monetary adjustments in advanced economies.
Xuan, who was promoted in October after four years as deputy head of the State Administration of Foreign Exchange, said the recent yuan rally was a result of China “optimising” pandemic controls and subsequent domestic recovery, as well as market expectations of a slowdown in US rate increases.
“We’ll prioritise stability and domestic needs,” he told a media briefing on Friday afternoon. “We’ll increase the flexibility of the yuan exchange rate so it plays its role as a stabiliser in macro economy and balance of international payments.”
The PBOC has long advocated two-way fluctuations and tried to boost the yuan’s flexibility. But unexpected factors – such as aggressive US interest rate increases, lockdowns and the Ukraine war – caused it to drop to its lowest level in November against the US currency since 2008.
The tide soon turned following Beijing’s zero-Covid exit, border reopening and better-than-expected economic recovery. Meanwhile, the US rate increase cycle is forecast to moderate this year.
The official yuan midpoint against the US dollar hit a six-month high of 6.7292 on Friday and marked a significant bounce from a low of 7.2555 on November 4.
Xuan said it was hard to estimate the short-term level of the yuan exchange rate, but the country has solid economic fundamentals to keep the currency “basically stable” in 2023.
The central bank will continue to guide exporters and importers to hedge against exchange rate fluctuations and strengthen monitoring of cross-border capital flows, he said.
Foreign confidence is returning, with billions of yuan poured into China’s capital markets in recent weeks. A net inflow of 64 billion yuan (US$9.5 billion) has flowed into the A-share market since the start of this year, while the CSI 300 index, which tracks major China-listed stocks, jumped 5.2 per cent in the same period, according to financial information terminal Wind.
Morgan Stanley earlier this week raised China’s 2023 economic growth forecast by 0.3 percentage points to 5.7 per cent, above a widely-expected government growth target of above 5 per cent.
It also revised up the 12-month US dollar-yuan target to 6.65, and forecast China to be the top global equity market performer this year.
He Ning, an analyst with Kaiyuan Securities, estimated that the one-way yuan appreciation cannot be sustained.
“The potential overseas recession could hit Chinese exports. If the trade surplus falls, it will curb the yuan appreciation,” she wrote in a note on Wednesday.
The warning is in line with China’s worsening trade outlook. The fall in exports accelerated to 9.9 per cent in December from 8.7 per cent a month earlier.
“A fast one-way appreciation does no good to exchange rate stability. It, together with the export downward pressure, may force the central bank to quit some countercyclical measures,” said He.