Policy Talking Points on the Chinese Economy

来源: CHINA FOREX 2017 Issue 3 作者:Mu Zhiqian

In an effort to gain a better understanding of the state of China's foreign exchange management policies,the renminbi's exchange rate trend and how do the foreign exchange reserves relate to renminbi internationalization,Debra Lodge,Managing Director Global Markets,Head of RMB Business Development North America,interviewed Mu Zhiqian a former consultant to the State Administration of Foreign Exchange. That discussion follows in question and answer form.

Q: "Counter-cyclical factors" are now being considered in the renminbi exchange rate mechanism. What are these factors and what is the basis for including them? Will this become a form of permanent official intervention in the market? Is this measure contrary to the ultimate goal of reform?

A: The measure is aimed at managing expectations. If we include macroeconomic data into calculating the mid-rate,including the growth rate of the Chinese economy or inflation figures,we can get a more accurate picture of economic conditions. This is essential for an economy experiencing structural adjustments. Moreover,the degree of exchange rate volatility varies. Counter-cyclical measures will be playing a very small role in smoothing out volatility. It is a very tricky question,but one thing can be sure of is that the ultimate goal of reform will not be changed. We can make adjustments on the measures used and the path we take. The "counter-cyclical factors" are only transitional measures used in order to achieve a free-floating currency.

Q: It is said that China has an exchange rate mechanism that uses a managed float. Does this mean the PBOC is conducting its strict exchange controls in managing the currency? Can exchange rate fluctuations be smoothed out using market mechanisms?

A: You can get a good idea of the answers by looking at the foreign exchange purchase position. The foreign exchange purchases between the second half year of 2012 and the first half year of 2014 were nearly zero,and that indicates that the PBOC had already withdrawn from normal intervention in the market. It let market supply and demand determine the exchange rate. When the market determines the exchange rate,a new equilibrium will be formed. However,the process can be slow or fast,but what really matters here is that it cannot have too great an impact on the normal operation of the economy. Generally speaking,regulators require a monitoring period where they can apply a variety of stricter measures and observe the results.

Q: Apart from these "counter-cyclical factors," are there any other measures to guide market expectations?

A: We have used only one measure from the policy toolkit,and that is that enterprises are required to put down a 20% cash deposit when purchasing foreign exchange forwards. By this means we can largely curb one-way expectations of depreciation.

Q: What is the "anchor" of the renminbi exchange rate? Without an anchor,some observers insist that the floating exchange rate is just a manipulated rate.

A: The "anchor" is a theoretical concept. Practically speaking,the US dollar was the renminbi¡¯s "anchor" from 1994 to 2005. During that period the renminbi was pegged to the US dollar. Even though the renminbi was "decoupled" from the dollar between 2005 and 2015,the dollar's influence was still there. In July 2015,the renminbi was completely decoupled from the dollar and was linked to a basket of currencies. There are mainly three factors that contribute to the renminbi exchange rate mechanism,namely supply and demand on the international and domestic foreign exchange markets,the movements of a basket of currencies and countercyclical adjustments. In this way we seek an ¡°anchor¡± as well.

Q: The renminbi has been holding around 6.60 to the dollar. At one point in 2017 it touched 6.9557 and in 2015 it stood at 6.2097. Is this kind of sharp depreciation and appreciation sustainable? And is this latest round of appreciation the result of foreign exchange management or the market itself?

A: The renminbi's depreciation followed by appreciation is the result of a number of factors. I would say that different factors were at work at different times. And it is reasonable that people hold divergent views of the direction of the renminbi. Whether the renminbi will consolidate at its current level depends on the state of the economy overall,the balance of payments position and how the market perceives these factors. With the economy stuck in low gear and the balance of payments maintained by tight foreign exchange controls it is difficult to see a steady movement in either direction.

Q: Could you give us an idea of the relationship between the renminbi exchange rate and the U.S dollar index from a historical point of view?

A: China¡¯s foreign exchange reforms have been in place for 23 years. In 1994,China unified its dual exchange rates for the renminbi,combining them into a single rate of one dollar to 8.7 yuan (renminbi). Over time the US dollar gradually grew stronger. In the following seven years,the Chinese economy was battling deflation. In 2002,the US dollar index started to weaken and the renminbi began its sustained appreciation which largely facilitated China¡¯s structural reform. In 2014,the US dollar started strengthening again and the August 2015 "exchange rate reform" (effectively a devaluation) cushioned China against the impact of exchange rates. Those three phases demonstrate the close relation between the renminbi and the US dollar. They also show that the renminbi is flexible and this favors the Chinese economy and reduces the impact of external developments.

Q: Renminbi depreciation has resulted in capital flight,and that was followed by stricter foreign exchange management. Does this mean that the pace of renminbi internationalization has slowed?

A: There is an old Chinese saying that basically translates as one cannot have everything all at once. Priorities differ from time to time. For instance,the priority now is guiding market expectations,assuring a stable exchange rate and preventing massive capital outflows when there are one-way expectations of renminbi depreciation. Also,some investors have shorted the renminbi on offshore markets and this is a challenge to renminbi internationalization. Renminbi internationalization is a long process and requires favorable external circumstances. We should have confidence in achieving our objectives.

Q: How would you prioritize these three objectives - protecting the exchange rate,protecting the nation's foreign exchange reserves and capital account liberalization?

A: In economics,one can only reach two out of these three objectives. The operation of the economy is far more complex than an interaction of positives and negatives. The exchange rate is a price and as a price it is flexible. The reserves are a measure of a nation¡¯s assets and liabilities. They reflect the extent of the country's links to the global economy and the allocation of its assets worldwide. Capital account liberalization is a stop on the road to marketization. The "open door" will not be closed. Some people even compare the foreign exchange management measures to a screen on a window. It shields the economy from harmful external elements.

Q: Some foreign investors say that the renminbi's movements are unpredictable. The currency's changes follow no observable rules. What is your view of that?

A: I can offer you three perspectives on that. First,the period of one-way exchange rate movements is over. There are various views in the market. Some see depreciation ahead while some others hold the opposite opinion. Some are buyers while others are sellers. Second,the frequency of appreciation and depreciation has accelerated. Lastly,the extent of market fluctuations is greater than before,and that means operational risks are higher. We can learn from experience,and there are rules that we can find if we look for them.