China’s central bank has warned investors to expect more “two-way volatility” in renminbi trading when foreign exchange markets reopen on Monday, less than a week after a 2 per cent downward “adjustment” sparked a week of roller-coaster trading for the currency.
In a statement issued on Sunday, Ma Jun, chief economist at the People’s Bank of China, said the Chinese government had “no intention or need to participate in a ‘currency war’”.
On August 11 the PBoC shocked global markets by lowering the renminbi’s daily dollar “reference rate” 1.9 per cent in what it termed a “one-off depreciation”.
The central bank said it would set the daily reference rate nearer to the renminbi’s previous market close in an effort to make the mechanism more market-driven — a goal of governor Zhou Xiaochuan as he seeks to earn overseas acceptance of China’s “redback” as an international reserve currency.
Previously the central bank had exercised wide discretion in setting the reference rate, allowing the renminbi to creep up gradually against the dollar in recent years.
The PBoC’s move sparked three days of steep falls against the dollar. This invited speculation that the government wanted to devalue the renminbi to revive a slowing economy, even if doing so sparked a renewed round of currency wars by encouraging other countries to follow suit.
In response the central bank intervened to pare back some of the renminbi’s losses against the dollar and convened an impromptu press conference by deputy governor Yi Gang on August 13 to warn markets that a large-scale devaluation was not in the offing.
In statement issued just hours ahead of the press conference, Mr Ma said the PBoC was “fully capable of stabilising the market exchange rate” thanks to China’s $3.7tn foreign exchange stockpile.
Having talked the renminbi down — and then back up — against the dollar last week, Mr Ma’s statement on Sunday appeared to warn investors not to expect further signalling from the central bank. The PBoC would intervene only in “exceptional circumstances” to counteract “excessive volatility”, he said.
Last week’s moves were aimed in part at restoring the international credibility of China’s financial reform programme, which was badly dented by an initially clumsy effort last month to arrest steep falls on its stock markets.
On Friday the International Monetary Fund welcomed the PBoC’s adjustments to the reference rate mechanism.
Also on Friday China’s security regulator indicated that it was prepared to stabilise the stock markets “for a number of years” through a state-backed fund. The China Securities Regulatory Commission has organised a so-called “national team” of state-owned brokers and fund managers, which have pledged not to sell shares until the Shanghai Composite index returns to 4,500 points.
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