PBOC Flags Continuation of Ongoing Forex Reforms, “Normalisation” of Bi-directional Movement in Renminbi Exchange Rate


China is expected to further drive reforms of the forex market and more flexible movement in the renminbi exchange rate following recent statements by leading government authorities.

At a press conference held on 23 May People’s Bank of China (PBOC) deputy-governor Liu Guoqiang (刘国强) said that since the start of 2021 the renminbi exchange rate had risen and fallen, fluctuating in both directions, while still maintaining “fundamental stability at a rationally balanced level.”

“At present, China’s forex market is actively balanced, the renminbi exchange rate is determined by the market, and exchange rate expectations are stable,” said Liu.

“In future the trend for the renminbi exchange rate will be to continue to be determined by market supply and demand and changes on international financial markets, and bi-directional fluctuation is becoming the norm.”

At its recently convened 51st meeting, the State Council’s Financial Stability and Development Committee called for “further driving interest rate and exchange rate marketisation reforms, and keeping the renminbi exchange rate fundamentally stable at a rationally balanced level.”

The statement arrived not long after the Chinese central bank stated in its “2021 First Quarter Monetary Policy Report” that it would “steadily deepen renminbi forex marketisation reforms, improve the managed fluctuation exchange rate system that makes market supply and demand its foundation and makes reference to a raft of currencies to undertake adjustments; strengthen the flexibility of the renminbi exchange rate, and make use of the exchange rate as an automatic stabiliser for adjusting the macro-economy and the balance of payments.”

Wang Youxin (王有鑫), senior researcher with the Bank of China, said to Securities Daily that following an expansion in China’s share of the global economy as well as further opening of its financial markets, the renminbi had been included in the balance sheets of an increasing number of wealth management institutions and investors.

As a consequence short-term fluctuations in the renminbi exchange rate can be expected to increase, and greater accommodation and adaptability is required.

“[China] should further expand the vigour of the market’s determination of the exchange rate, strengthen the flexibility of bidirectional fluctuations in the renminbi exchange rate, and provide more risk hedging tools in order to satisfy the need for risk management,” said Wang.

Wang expects regulators to strengthen guidance of market expectations, diversify the tool kit for cross-border capital flows and exchange rate management, retain management tools for extreme circumstances, and reduce the occurrence of extreme exchange rate adjustments and pro-cyclical behaviour.