Kristian Rouz — Officials at the China Banking and Insurance Regulatory Commission (CBIRC) say they don't expect the mainland's currency, the renminbi, to devaluate in the wake of the recent exchange of tariffs between China and the US.
The CBIRC has also warned against bearish bets against the renminbi in currency markets, saying speculative activity might distort Beijing's policy transmission.
Albeit supportive of China's national exports and international competitiveness amid the mounting trade tensions, the renminbi's decline 'below 7' could also prompt a new round of accusations of currency manipulations from the US.
China retaliated on a more modest scale, yet, the mainland's dependence on exports for budget and corporate revenues might prompt Beijing to seek new ways to support its competitiveness in global trade.
A devaluation is one way of doing just that. Yet, the CBIRC rejects such a possibility.
"Short-term fluctuation of the yuan exchange rate is normal, but in the long-run, China's economic fundamentals determine that the yuan will not depreciate persistently," CBIRC spokesman Xiao Yuanqi said. "Those who speculate and short the yuan will for sure suffer a heavy loss."
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Over the coming weeks, the PBOC is widely expected to ramp up currency interventions and other tools to support the renminbi's exchange rate against the dollar at its current levels. This, officials in Beijing believe, is necessary to reassure both the international investors and the US — amid the ongoing trade talks — that China is committed to fair trade and investment practices.
Currency devaluations are considered as giving unfair advantages to national economies by several international watchdogs since the 'race to the bottom' back in 2015 — when a basket of emerging market currencies slid against the dollar significantly amid heightened competition in the stagnant global consumer market at the time.
Now that global trade disruptions are weighing on economic growth and consumer demand even in advance economies, such as Germany, a renminbi devaluation could really save the day for mainland China.
And that might just be an option, reports claim.
"In terms of the market, 7 is seen as an important ‘integer threshold'," Guan Tao of Wuhan University said. Yet, "there is not enough information to support whether 7 is as important as the market thinks".
This comes as international trade in the renminbi has increased since 5 May, when the latest round of US-Chinese trade dispute is believed to have begun. The talks continue, but market participants are already testing Beijing's commitment to maintaining the stability of its currency by shorting the renminbi.
If China wants to 'protect the 7' — the renminbi is currently trading at 6.919 per 1 USD — it would have to burn its gold and currency reserves. It's unclear whether Beijing is willing to do that.
However, if the PBOC chooses to let the renminbi slide, its next step would be 'protecting the 8' — as a devaluation to below 8 would bring China back to the times its was a much smaller and vulnerable economy. The renminbi was pegged at 8.28 per US dollar in the mid-90s-mid-2000s.
"Going through 7 raises the question of where the yuan would go next. It does risk destabilising expectations," Brad Setser of the Council on Foreign Relations said.
For their part, officials at the CBIRC are urging for tighter controls of money flows, while also insisting that 'defending the 7' is strategically more important at this point — as a stable renminbi would provide important reassurances to international partners of Chinese firms.
"We must be especially vigilant about money from overseas moving in and out in large quantities, and hot speculative money, and we must resolutely fight bubbles in real estate and financial assets," CBIRC's Xiao said.
The PBOC is now considering whether political rhetoric or sound monetary policies should prevail at this stage.