Advisor to People's Bank of China: RMB Won’t Weaken to 7.00 against the US dollar

RMB USD
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China’s RMB won’t weaken to 7.00 against the US dollar as it wasn’t desirable for both the US and China, said Sheng Songcheng, a senior adviser to the People’s Bank of China (PBOC) recently.

While export is no longer the number driver of China’s economic growth, a weakening RMB will increase capital outflow and escalate the current trade standoff, Sheng noted.

“Net exports contributed 0.6 percentage points to China’s growth in 2017 while consumption and investment contributed 4.1 percentage points and 2.2 percentage points respectively,” he said.

ING is one of those companies that have revised their USD/RMB forecast to 7.0 by end-2018. “But there's no panic in the market and we don't expect a repeat of August 2015,” said ING at end-June.

The central parity rate of the Chinese currency dropped 191 basis points to 6.8513 against the greenback on Monday, according to the China Foreign Exchange Trade System (CFETS).

The rate weakened from 6.8322 last Friday, now at its lowest point since May 3, 2017, CFETS data indicates.

20% reserve requirement ratio is back

The drop came after the central bank’s adjustment on forward foreign exchange risk reserve requirement ratio which has become effective today.

PBOC imposed a 20% reserve requirement ratio on financial institutions for some forward forex trading last Friday, after the requirement was ditched last September.

The move was aimed at preventing macro financial risks and promoting prudent operation of financial institutions, PBOC said in a statement.

The central bank added that it’ll make counter-cyclical adjustments based on market conditions to keep forex markets stable, the PBOC said.

ING: PBOC wil be forced to use more of its currency toolkit to prevent weakening to 7.00

This reserve requirement is a relatively soft measure and avoids the bigger stick of FX intervention or rate hikes at a time policymakers are delicately deleveraging the economy, said ING in a statement.

"Though USD/RMB sold off 1% on Firday's news, we doubt investors will be encouraged to return to RMB exposure anytime soon," ING noted. "US Commerce Secretary Wilbur Ross has made the US trade position clear by outlining that Washington wants to create a situation where it’s more painful for China to continue current practices than it is for China to reform."

While an increase in the proposed tariff rate to 25% on the next US$200 billion worth of Chinese imports looks likely over coming weeks, the firm US rates and what look like continued dollar strength over coming months will force the PBOC to use more of its currency toolkit to prevent USD/RMB going through 7.0, ING predicted.