Stable renminbi foreseen

Solid economic growth expected amid fine-tuning of policies

Market participants foresee a relatively stable Chinese currency in the near term, without fear of impacts from the US-China trade dispute. They expect solid economic growth momentum amid policy fine-tuning.

They showed confidence after the central bank announced it was imposing a 20 percent reserve requirement ratio on the trading of foreign-exchange forward contracts late on Friday. This financial instrument is usually used by enterprises to hedge futures' exchange rate risks, according to a statement on the bank's website.

Under the new requirement, the cost to banks in Hong Kong and other major hubs outside of the Chinese mainland will be more if they sell the renminbi using currency forwards.

As a result, the offshore renminbi strengthened immediately by more than 0.5 percent to 6.8292 against the US dollar. The onshore renminbi spot exchange rate also climbed to around 6.8300 per dollar from 6.8965 during that day's trading.

As the renminbi largely reversed its relation with the US dollar from February to mid-June, it will probably return to a regime of relative stability in the trade-weighted exchange rate, or to appreciate if the broad trade-weighted US dollar depreciates, said Robin Xing, chief China economist with Morgan Stanley.

The central bank's latest move is a part of the macro prudential regulatory measures to cushion exchange market vulnerabilities, a representative of the People's Bank of China said in a statement on its website.

It is neither a government intervention measure nor capital control, according to the spokesperson.

Song Yu, an economist at Goldman Sachs' joint-venture company Beijing Gao Hua Securities, said the renminbi's recent depreciation "is likely viewed favorably by policymakers who have allowed market forces to work without suffering the side effects in terms of reserve loss."

After the reform of the exchange rate regime on August 11, 2015, the PBOC included commercial banks' foreign-exchange forward business into a macro prudential supervision framework. It required banks to keep a reserve of 20 percent of income from selling the currency forward contracts as a risk provision, to prevent large exchange rate fluctuations.

The PBOC decided to cut the reserve requirement to zero in September 2017, when it said the renminbi exchange rate returned to float around an equilibrium level with rational market sentiment.

The Chinese exchange rate market has shown some fluctuations recently, influenced by the Sino-US trade friction and changes in the international financial market, said the PBOC spokesperson.

Earlier on Friday, China announced it would levy differentiated additional tariffs on about $60 billion of imports from the United States, if the US further escalated trade frictions.

The announcement came after the Office of the United States Trade Representative announced earlier last week that it was considering increasing the proposed additional duty on $200 billion of Chinese products from 10 percent to 25 percent.

"The US is escalating the trade war, which brought much uncertainty that hurts the whole world's economy, including fluctuations in the global exchange rate market," said Liu Shangxi, head of the Chinese Academy of Fiscal Sciences.

"The recent renminbi depreciation was mainly because of the fragile market sentiment with uncertainties, instead of any deterioration of Chinese economic foundations," according to Liu. He disagreed with some US scholars' view that attributed the renminbi's depreciation to a change of the economic base.

China is stepping in to stabilize economic growth by pushing the fiscal policy "more proactive", which is required to coordinate with a prudent but more flexible monetary policy, according to a series of high-level government meetings during the last two weeks.