PBoC’s move to liberalise RMB

JP Morgan Asset Management Chief Asia Strategist Tai Hui comments on how investors should interpret China’s currency devaluation

The PBoC’s move should be seen as further liberalising the RMB as China continues to justify the RMB as part of the IMF’s Special Drawing Rights (SDR) currencies.

As China’s domestic capital markets become more developed, the PBoC believes it is time for the market to play a bigger role in deciding the exchange rate in order to better reflect market demand and supply. The central bank has highlighted that they would like to give more weight to the mark-to-market pricing mechanism because the reference rate has shown significant deviation from the market spot rate for a prolonged period of time.

While some investors could interpret the latest move as additional stimulus to support weak export performance, we believe yesterday’s announcement should not be viewed as “competitive devaluation” because this is a risky strategy for various reasons.

First, the benefits of boosting exports in today’s low global growth environment does little to stabilise the Chinese economy as policy makers have sufficient fiscal and monetary stimulus measures in place to boost domestic demand if deemed necessary. Second, fragile onshore investor sentiment after the stock market rout in the past two months could be further undermined by a depreciating currency.

China’s foreign exchange reserve has fallen by $127bn since the start of 2014, to $3.7tn. This remains a strong buffer and part of the capital outflow is a result of liberalisation of its outward direct investment by Chinese companies, but an increase in hot money outflow could still poses a challenge to policymakers.

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