Why has the renminbi exchange rate fallen again?
- By Zhang Ming
0 Comment(s)
Print
E-mail China.org.cn, March 4, 2014
Given that the PBC has a tradition of dollar purchasing to slow down the appreciation of the yuan, it may have recently purchased more dollars to reduce market supply and push the US dollar to appreciate. The PBC may also have directly intervened in the dollar's central parity rate and forced the yuan to retreat.
There are three reasons why the central bank may have purposefully depreciated its own currency.
First, it wanted to cause losses to cross-border arbitrage, as a warning to speculators. China used to maintain a benchmark interest rate far higher than those of other countries, which, along with expectations of the yuan's appreciation, have fostered cross-border speculation.
Central state-owned enterprises and foreign trade-oriented companies, among others, have made huge gains because of this, causing the PBC to suffer, because the central bank was forced to buy in more dollars with the appreciating renminbi, meaning that the government will possibly suffer foreign exchange revaluation losses.
By intentionally injecting new uncertainties into the foreign exchange market in China, the central bank will likely scare off potential arbitragers.
Second, the sign indicates the central bank may be preparing to relax daily average volatility of the yuan's rate against the dollar. Before this measure is implemented, a sudden arbitrage-seeking capital influx will cause the yuan to appreciate dramatically, a situation the Chinese central bank does not wish to see.
Third, the central bank might be suppressing the shadow banking phenomenon by maintaining a high interest rate in the interbank market. This would require the yuan to depreciate in order to lower market incentives.
Over the past two years, risks have continued to mount in China's financial sector, as a result of excessive bank-trust cooperation, financial products and other forms of shadow banking. The PBC has maintained a high interbank market interest rate, in a bid to encourage deleveraging commercial banks, and ideally, lower such risks.
