Domestic strength offsets US rate tinkering claims

The Chinese economy has changed over the past decades and now relies mostly on the domestic market for sustainable growth, which means there is no reason for China to manipulate exchange rates to cope with trade disputes, Chinese experts said on Tuesday.

The US unilateral and groundless labeling of China as a "currency manipulator" indicated the escalating Sino-US trade friction, but the Chinese economy's strong resilience, rooted in its huge domestic market and complete industrial sectors, will support it, they said at a seminar in Beijing.

"A fundamental change in the Chinese economy is that its growth is mainly driven by the domestic market nowadays. The Chinese economy ran smoothly during the first half of 2019 with the balance of international payments, checked financial risks, and a stable renminbi exchange rate," said Wen Bin, chief analyst at China Minsheng Bank.

"It is neither necessary nor likely that China will use the exchange rate to cope with trade disputes."

The renminbi's exchange rate against the US dollar will likely move within a reasonable level with two-way fluctuations, he added.

Zhang Xuechun, deputy director of the research bureau of the People's Bank of China, said the US labeling on China as a "currency manipulator" contradicted criteria of its own and basic economic principles, and went against the International Monetary Fund's assessment of the RMB exchange rate.

The latest report by the IMF said that in 2018 the exchange rate of the Chinese yuan had been broadly in line with sound economic fundamentals for the medium term and that China's monetary authorities had barely intervened in the foreign exchange market.

Since the US escalated trade friction with China, the global economy has been suffering, Zhang said, adding that as long as China runs its own affairs well, including deepening supply-side reform, the Chinese economy will continue to develop well.

"Any country will not quit from a huge market with 1.4 billion people so long as the fundamentals of our economy are stable, and we are firm with our strategies and keep opening up orderly," she said.

Wen also said China needs to further deepen reform and opening-up, to pursue high-quality economic development, against the backdrop of downward pressure in economic development and possible punitive measures by the US in the future.

In the short term, it is important to adhere to a proactive fiscal policy and prudent monetary policy, and enhance policy coordination and flexibility, he said.

Policymakers should work on reducing real interest rates in order to promote investment and consumption and boost domestic demand, he said.

Martin Petch, senior credit officer at Moody's Investors Service, said while the "currency manipulator" designation is unlikely to have a material effect on China's foreign exchange policy, it is expected the positions of both countries on the trade dispute will harden.

"More broadly, worsening trade and currency tensions between the US and China will curb global growth. Market expectations of further declines in the renminbi may also lead to devaluation in other currencies, particularly those which have strong trading ties with China," he said.

"Such an escalation would increase risk aversion and could lead to an abrupt repricing of risk assets globally. Tighter financial conditions, notwithstanding the US Federal Reserve's more accommodative policy stance, would drag global growth significantly lower. Spillovers on investment and through the global production chain would be much larger."