Flash Notes-China:PBoC Clarifies Further On RMB Policy

PBoC held a news conference to further clarify its stance on RMB exchange rate, with market-based pricingclearly a priority in the change in fixing mechanism

    The bulk of the adjustments on China’s FX appears to be over for now and that should help calm marketsentiment as the authorities have no intention to set the RMB on a depreciation trend.

    We reiterate our revised forecasts for USD/CNY at 6.45 for end-2015, which would mean a 4% depreciationfrom 2014, a similar magnitude of the annual appreciation pace seen in the past decade.

    PBoC Reiterates Move Towards Market-based FX Pricing

    After roiling the global FX market since the change in fixing mechanism on Tue (11 Aug), China’s central bank PBoC held apress conference on Thur (13 Aug) to clarify further its stance in RMB exchange rate policy.

    Key points from PBoC at the press conference (see link below for full transcript):

    Reiteration that the change in fixing methodology was part of reform towards market pricing

    Reaffirmation of China’s managed exchange rate system

    The new fixing will be more market driven, with long term benefits to exchange rate system

    Compared to a fixed rate, more flexible exchange rate will cushion shocks and provide stability to the economy

    The unusual jump in bank loans in Jul added downward pressure on RMB exchange rate

    The one-off adjustment was to address the 3% of deviation in exchange rate

    The 9-10% gain in real and nominal trade-weighted RMB since 2014 means a weaker RMB was needed to restorestability on trade-weighted basisAfter 2 days of adjustment, disparity on RMB exchange rate had been addressed and closer to market levelThe volatility over the past 2 days of adjustment within reasonable limits and range even for those who had yet tohedge their foreign currency exposures, and will not affect RMB internationalization process

    Based on domestic and global factors, no basis for RMB to be on a depreciation trend

    Speculation by foreign media of a 10% depreciation of the RMB was “nonsense” and baseless

    China is not weakening the RMB to stimulate exports

    Fundamentals on RMB still sound: FX reserves, fiscal position, financial soundness, external demand for RMB, andrebalancing of portfolios

    Still conceivable for RMB to enter into trend appreciation in future

    China’s capital inflows and outflows are “normal” and no signs of excessive outflows