PBoC vows to keep currency stable

China’s central bank chief says he is confident the Chinese authorities can keep the renminbi stable, hours after the currency broke through seven yuan per US dollar for the first time since 2008.

“This fluctuation is driven and determined by the market,” Yi Gang, governor of the People’s Bank of China (PBoC), said in a statement on late Monday (August 5). “The current RMB exchange rate is at an appropriate level, whether in terms of the fundamentals of the Chinese economy or the balance of market supply and demand.”

Yi’s statement come at a time when US president Donald Trump has accused China of currency manipulation following the renminbi’s fall on Monday. 

Yi also denied that China would weaponise the exchange rate in the escalating trade dispute between the US and China.

“As a responsible big country, China will abide by the spirit of the G20 leaders’ summit on the exchange rate issue, adhere to the market-determined exchange rate system and not use the exchange rate as a tool to deal with external disturbances, such as trade disputes,” said Yi.

In a separate statement issued earlier on Monday, the central bank explained why the renminbi had weakened below seven against the US dollar.

“Due to the effects of unilateralism and trade protectionist measures and the imposition of tariff increases on China, the renminbi has depreciated against the US dollar today, breaking through seven yuan, but the renminbi continues to be stable and strong against a basket of currencies,” the central bank said.

“It’s more like a reservoir. When water is abundant, it will be higher, while in the dry season, it will fall back down again,” the PBoC said, suggesting it was comfortable about the current fluctuations of the currency.

PBoC assures market

The renminbi breaking ‘seven’ does not mean the trade war has escalated into currency war, according to Trang Thuy Le, a forex strategist at Macquarie. While the onshore renminbi could weaken to 7.10, there is not likely to be a trend depreciation of the renminbi from here, says Le.

Renminbi weakness also suggests a slowing economy in China, says Larry Hu, an economist with Macquarie.

“In the case of Baoshang Bank, the PBoC wanted to break implicit guarantee but prevent the market from panic. The dual considerations also apply to the renminbi,” says Hu. “On one hand, the PBoC wants to tell the market there is no line in the sand. On the other hand, it has to prevent a replay of August 2015.”

Hu referred to the central bank’s exchange rate reform in August 2015, when the market panicked and the Chinese currency dropped 2% against the US dollar in one day, the biggest single-day decline ever recorded.

Yi’s statement aimed to prevent such panic so as to reassure investors that the PBoC is capable of keeping the renminbi stable.

“Although the RMB exchange rate has fluctuated due to recent external uncertainties, I am confident that the RMB will continue to be a strong currency,” Yi said.

The renminbi slid 1.3% to 7.0298 against the dollar on Monday. The sharp depreciation of the currency against the US dollar came days after Trump stunned financial markets by vowing to impose 10% tariffs on the remaining $300 billion of Chinese imports, starting from September 1, even as trade negotiations were ongoing.