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Deciphering China's Foreign Exchange Puzzler
Paul Golden April 12, 2024
Navigating through the complexities of China's foreign exchange FX market has often been akin to a guessing game. Previous instances where policy directions have shifted have left financial analysts pondering whether to attribute sudden corrections in the Renminbi reference rate as mere coincidences or deliberate moves orchestrated by the People's Bank of China PBoC. Or perhaps, they might be a combination of both.
The March 22 adjustment by the PBoC saw the USDCNY fixing rsed by the largest amount since January. This move enabled USDCNY to breach the 7.20 mark for the first time since November 2023, sparking speculations that China's central bank could adopt a managed depreciation regime - one where the dly fixing is incrementally increased based on the upper limit of its 2 trading range.
Simon Harvey, head of FX analysis at Monex Europe, posits that capital outflow pressures coupled with potential impacts on investor and consumer confidence and yuan depreciation are undermining China's long-term economic objectives. These include rebalancing from export-driven growth to consumption-led growth and enhancing the international usage of the yuan.
Notably, despite being deemed expensive relative to its nominal trade-weighted index, China’s exports remn competitive once adjusted for inflation. This suggests that allowing a weakening of the yuan may not offer significant gns in terms of growth enhancement.
Given that China's exports are competitively priced even after accounting for inflation, there is little economic advantage from permitting the yuan to depreciate, Harvey explns.
In attempting to forecast policymakers' moves, one often encounters a degree of futility. As such, it should come as no surprise when the PBoC rses its USDCNY fixing by a notable margin - providing clarity only in retrospect rather than predicting outcomes beforehand.
Navigating China's foreign exchange market requires nuanced insights into both economic fundamentals and policy intentions, making this a guessing game with an element of foresight necessary to understand subsequent moves.
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