Why Does The PBOC Dare To Let Go Of The Exchange Rate?

David Woo, director of global interest and foreign exchange research at the Bank of America, said that once the renminbi gets the status of a basket of currencies in the International Monetary Fund (IMF) special drawing rights (SDR), China's action to support the RMB exchange rate is likely to come to an end.

Since the sudden devaluation in August 11th, although the Chinese economy has not shown any signs of change and the momentum of capital outflow has intensified, the Central Bank of China has gradually made the RMB rebound through a series of market intervention and stable intermediate price setting. Before the IMF adjusted the SDR basket valuation for two times every 10 years, the PBOC's support for the exchange rate effectively reduced the volatility of the RMB exchange rate. Woo said that once the renminbi was "successful", China would allow its currency to depreciate, especially if the Fed raised interest rates at the end of the year.

"After the renminbi enters the SDR, they no longer have the power to support the RMB exchange rate," Woo said in an interview in Taipei on Friday. "Once the Federal Reserve raised interest rates in December, it gave China a perfect reason to let go, because they can completely say that they need to decouple from the US monetary policy."

Zhu Haibin, chief economist of JP Morgan, has a completely different view from Woo. He believes that the renminbi will not depreciate rapidly after entering the SDR basket, and it is called conspiracy theory. Zhu Haibin said last week that rapid devaluation would exacerbate market volatility and hurt the economy. JP Morgan and Bank of America are the first and second largest banks in the United States respectively.

China's economic growth in the three quarter of this year has reached its lowest level in six years. Data released on Sunday showed that imports fell for Twelfth consecutive months in October, while exports fell by 6.9% in dollar terms, a drop larger than that of all 31 economists who accepted the Bloomberg survey. China's foreign exchange reserves have decreased by more than US $300 billion to $3 trillion and 530 billion so far this year, and the growth of US $11 billion 400 million in October was the first in six months.

Woo says, Capital outflow The threat of acceleration will not prevent the Central Bank of China from letting the renminbi depreciate because most of the outflows are attributable to the repayment of overseas debts by Chinese companies, and most of this "repayment" has already been completed. "China can no longer have fish and bear's paw," he said. "Yes. RMB Letting go is a necessary condition for China to ease monetary policy.

With the central bank supporting RMB exchange rate And in order to curb the six deceleration of the economic slowdown in the benchmark interest rate, the change in China's foreign exchange reserves in the past year has attracted wide attention. Yi Gang, vice president of the people's Bank of China, said at that time that flexibility in exchange rate could increase the room for monetary policy adjustment.

Following the rise of 0.3% and 0.6% respectively in 9, 10 and 0.3% months, the RMB exchange rate against the US dollar in the Shanghai market has fallen to 0.6% to 6.3530. this month. A source familiar with the matter told Bloomberg last month that the IMF representative has informed China that the RMB may soon be included in the basket of currencies. Bank of America predicts that by the end of 2016, the RMB will fall to 6.9 against the US dollar, while the median expected value of analysts surveyed by Bloomberg is 6.6.