The Chinese central bank has committed to maintaining the stability of the renminbi just after it breached the threshold of seven to the US dollar amidst unabating trade tensions with the United States.
A senior official from the People’s Bank of China (PBOC) responded to questions on the issue in its news outlet Financial Times (金融日报) on 5 August.
With regard to the issue of why the renminbi “breached seven,” the official said that it was the result of factors “including unilateral and trade protectionist measures, as well as expectations of the levying of more tariffs against China.”
“However, the renminbi continues to maintain stability and strength against a basket of currencies, and this is a reflection of fluctuations in market supply and demand and the international forex market.
“China implements a managed, floating exchange-rate system which has market supply and demand at its foundation, and makes reference to a basket of currencies when implementing adjustments.
“If we look back at changes in the renminbi exchange rate over the past 20 years, we will discover that at times the renminbi has been over eight to the US dollar, and at other times it has been over seven or six. At present the renminbi exchange rate has once again returned to over seven.
“This ‘seven’ isn’t an age, which doesn’t return after passing, and it isn’t a dam, which once burst creates a flood for a thousand leagues….”seven” is more like the level in a reservoir, which is higher in times of ample water, and falls when water is scarce. To have rises and falls is normal.
“While the renminbi has recently depreciated against the US dollar, in historical terms the renminbi has appreciated overall.
“Over the past 20 years the nominal effective exchange rate and real effective exchange rate of the renminbi as calculated by the Bank for International Settlements have both risen by around 30%, and the renminbi has risen 20% to the US dollar – it’s one of the strongest out of the major international currencies.”
With regard to the future direction of the renminbi exchange rate after breaching seven to the dollar, the PBOC official said that long-term performance would be “determined by fundamentals,” while in the short-term market supply and demand as well as the performance of the US dollar would have a sizeable impact.
“A market-based exchange rate formation mechanism is of benefit to employing the role of price leverage to adjust the supply-demand balance, and at a macro-level playing the role of an ‘automatic stabiliser’ for adjustment of the economy and the balance of payments.
“Over the past several years, the People’s Bank of China has accumulated rich experience and policy tools during the process of dealing with exchange rate fluctuations, and it will continue to innovate and enrich its tool box for adjustment and control.
“With regard to positive feedback which might appear on the forex market, it will adopt necessary, targeted measures, firmly strike against short-term speculation, maintain the stable operation of forex markets and stabilise market expectations.
“The People’s Bank of China has the experience, the confidence and the capability to keep the renminbi exchange rate fundamentally stable at a rational, balanced level.”