ECONOMY ListPage

By Yin Lei

There is a consensus at the forex market that the RMB's exchange rate will be on a stable track for the second half of 2018, according to reports by several of China's financial media.

Last Friday, just when the RMB was sliding toward 6.90 against the USD, China's central bank boosted the reserve requirement ratio (RRR) on the forward sales of foreign exchange to 20 percent.

Since mid-June, the RMB has been on a continuous decline versus both the USD and the basket of currencies it is pegged to. Concurrently, the China Foreign Exchange Trade System (CFETS) RMB Index dropped out of the preferred 94-95 range to 92.41.

In its announcement, the People's Bank of China (PBOC) said the RRR adjustment was meant to prevent macro-financial risks, promote discreet operations of financial institutions and strengthen macro-prudential management.

The RRR, as one of the three tools to curb exchange rate fluctuations, would increase the costs of forex forward trading and RMB short-selling after a jump from zero to 20 percent. The decrease in the forex forward trading and hedging activities will stabilize the expectations for the RMB exchange rate, pointed out a report by the China Securities News.

In light of the uncertainties in global trade and the different economic growth and policies between China and the U.S, the RMB may still face downward pressure, but the policy signal as reflected in the RRR adjustment will mitigate the volatilities in its exchange rate, analysts believed in the above report.

Other tools are available too. The PBOC said last Friday that if necessary, it would take measures in the future to conduct counter-cyclical adjustment. This would involve the use of the counter-cyclical factor which was introduced to the pricing model of the RMB's central parity rate in May 2017.

In January, the CFETS once stressed that in case of any pro-cyclical fluctuations at the forex market that lead the RMB exchange rate to deviate from the economic fundamentals, the quoting banks under the pricing model could adjust the counter-cyclical factor based on the specific situation.

A report of the Securities Times also held the view that the RMB would not face too much downward pressure, considering the relatively stable US Dollar Index after the previous rises and the policy tools available for the PBOC. However, it warned of possible disturbances that may stem from the remarkable changes in China's international balance of payments. In the first quarter, China's current account showed a rare deficit.