PBOC’s Ma Says Yuan Exchange Rate Increasingly Transparent

  • Yuan may appreciate, depreciate against basket in medium term
  • Increased flexibility helps ease devaluation pressure, Ma says

The yuan’s pricing mechanism is increasingly transparent and its rate against a basket of currencies may alternate between appreciation and depreciation, according to Ma Jun, chief economist of the People’s Bank of China’s research bureau.

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Since the spring festival holiday in February, changes in the yuan’s central parity rate against the dollar have been closely aligned with the fixing mechanism, which is the "closing price of the previous day + daily movement of the RMB/USD rate for maintaining a stable basket," Ma said in written comments to Bloomberg News, using the abbreviation for renminbi -- another term for China’s currency.

The yuan’s fixing mechanism is "increasingly rule-based and transparent," said Ma, who doesn’t have a direct policy-setting role. Market players, including traders and analysts at major banks, have gained a "clearer understanding" of the mechanism and that has had a positive role in stabilizing market expectations, he said.

Ma’s remarks follow comments by U.S. Treasury Secretary Jacob J. Lew, who urged China to improve monetary-policy communication as it takes on a larger role in the global economy. Lew was in Beijing this week for U.S-China Strategic and Economic Dialogue talks.

While greater attention is given to the basket in the exchange-rate formation, Ma stressed that it doesn’t mean the yuan is strictly pegged to a basket. "Any strict peg, whether to a basket or a single currency, would undermine monetary-policy independence of the country," he wrote.

"Since March, we reinforced our ‘reference’ to the basket. This has led to a visible decline in the average daily volatility of the yuan to the basket, while the daily volatility of the yuan against the dollar has increased," he said.

Keeping Calm

Though the yuan has dropped against the dollar this quarter, volatility hasn’t escalated in tandem, Standard Chartered Plc analysts concluded. "Markets have generally been reacting much more calmly to swings in USD-CNY spot and fixing," Eddie Cheung, a currency strategist at the bank in Hong Kong, wrote in a note this week, using the abbreviations for dollar and yuan. "The authorities also demonstrated how they are referencing FX policy to the CNY basket."

Ma said that multiple factors should be watched as they determine if the yuan strengthens or weakens against the basket over a given time period, including macroeconomic conditions, market demand and supply, changes in expectations and relative changes in consumer prices in different countries.

"Recently, the factors we’ve paid attention to include the deleveraging of external debt by Chinese companies, their willingness to ‘go global,’ market expectations of the Fed’s rate hikes, the impact of domestic economic data on expectations, and capital outflows in other emerging markets," he said.

He said it is also worth noting that the interbank bond market has just been fully opened to overseas institutional investors. "That will help increase inflows on the capital account and offset some of the downward pressure on the yuan," Ma said.

— With assistance by Heng Xie, and Yinan Zhao

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