In order to calm the market.
It has been noted that PBoC Governor Zhou Xiaochuan broke his silence to calm the market and restore stability.
According to a research note from Standard Chartered, the Renminbi exchange rate has been the focus of the market in the past months. Since joining the Special Drawing Rights (SDR) basket, the Chinese yuan (CNY) has depreciated nearly 3% against the USD.
To stabilise the exchange rate and avoid the vicious circle of depreciation and capital outflows, the People’s Bank of China (PBoC) has massively intervened in the FX market, leading to a rapid decline in China’s FX reserves. Zhou voiced his opinions on the exchange rate, macro-prudential policies and the digital currency in an interview with Caixin magazine, published on 13 February.
The interview marked an effort by the central bank to improve communications with the market following the recent market volatility.
Here’s more from Standard Chartered:
Zhou’s main messages from the interview are as follows: there is no basis for sustained CNY depreciation – the current account balance is the fundamental factor determining the exchange rate. China still has a sizeable current account surplus and low inflation further supports currency stability.
The PBoC will aim to stabilise the CNY against a basket of currencies, although the CNY will not be pegged to a basket. Meanwhile, the PBoC will manage USD-CNY single-day volatility.
And much of the market talk about capital controls is unfounded, potentially created by speculators with an intention to create panic among households and exporters/importers and support speculators’ short CNY positions.
The governor’s messages are consistent with our views. We also believe the CNY will be stable against a basket of currencies in 2016; however, USD-CNY may be volatile depending on USD strength/weakness.
The government may hold off on opening the capital account until capital outflows ease. We expect USD-CNY to rise to 6.65 in H1-2016 on USD strength, but fall back to 6.56 by the year-end as the USD retreats (as we no longer expect another Fed rate hike this year).
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