Shanghai, December 13 (Reuters)-A former senior official of China's foreign exchange regulator stated that avoiding excessive appreciation of the renminbi should be one of China's priorities for managing market expectations and supervision.
Guan Tao, chief global economist of BOC International and former director of the Balance of Payments Department of the State Administration of Foreign Exchange (SAFE), said that the challenge of exchange rate fluctuations or flexibility is that the currency may overshoot and deviate from its economic fundamentals. ), wrote in a social media post over the weekend.
"Market supply and demand are the dominant force driving the rise of the renminbi this year, and orderly expansion of domestic foreign exchange purchases and overseas investment channels should be the key to stabilizing the renminbi." He said.
The renminbi is one of the best performing Asian currencies this year, rising by about 3% against the dollar. Calculated at the trade-weighted exchange rate (.CFSCNYI), the RMB is at its highest level since the end of 2015.
"The soaring multilateral renminbi exchange rate has raised concerns about competitiveness," Guan said.
The People’s Bank of China (PBOC) announced that it will increase the foreign exchange reserve ratio (RRR) from 7% by 200 basis points (bps) to 9% from December 15th, requiring financial institutions to hold an additional US$20 billion in foreign exchange held by the central bank. In reserve. read more
The second increase in the foreign exchange reserve ratio this year has convinced some market participants that the authorities are becoming more and more disturbed by the rapid appreciation of the renminbi.
Nomura Securities Chief China Economist Lu Ting said: "The decision of the People's Bank of China to raise the foreign exchange deposit reserve ratio has sent a clear signal that it does not want the RMB to appreciate too quickly."
"The renminbi is overvalued. I think the extremely strong renminbi is not conducive to exports."
Lu said that the huge capital inflow brought about by the surge in trade and the current account surplus poses a challenge to the renminbi, and the central bank is unwilling to purchase foreign exchange from commercial banks, further pushing the renminbi higher.
As of the end of November, these surpluses and investment flows have pushed the Bank of China's foreign cash deposits to US$1.02 trillion.
Nomura expects that the authorities will introduce measures to stabilize exports and at the same time absorb US dollar deposits from banks to ease the pressure on the renminbi and supplement the cash balance in the financial system.
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