SCIO briefing on maintaining financial market stability during COVID-19 epidemic
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E-mail SCIO, March 25, 2020
Hu Kaihong:
As the time is running out, next will be the last question!
Xinhua Daily:
Will the ongoing global epidemic of COVID-19 generate a decisive trend-reversing influence on the renminbi exchange rate? At the same time, I noticed that the renminbi depreciated against the U.S. dollar. Will it affect cross-border capital flow in China and is it possible that large amounts of capital will flow out of China? Thank you!
Chen Yulu:
The renminbi exchange rate is a topic currently drawing widespread attention. As is known, China adopts a managed floating exchange rate system based on market supply and demand and adjustable with reference to a basket of currencies. The market plays a decisive role in the formation of the exchange rate. Over the last years, we have witnessed both appreciation and depreciation of the renminbi, and the renminbi exchange rate has moved in both ways, which were driven by market forces. Influenced by the global epidemic of the COVID-9, the international foreign exchange market suffered notable volatility. Although the renminbi exchange rate was affected, the fluctuations were at a reasonable range and the exchange rate has maintained basically stable. For example, the euro has depreciated by 4.7 percent against the U.S. dollar since earlier this year. The pound has slumped by more than 12 percent against the U.S. dollar. Comparatively, the renminbi depreciated by only 1.8 percent against the U.S. dollar. With all other factors considered, the CFETS yuan exchange rate composite index has risen. In general, the renminbi exchange rate against the U.S. dollar is expected to fluctuate around RMB 7 to US $1 and continue moving in both ways. The exchange rate market is stable and the expectation of the exchange rate is also stable.
In the long run, the trend of the renminbi exchange rate depends on the fundamentals of the economy. As China continues to put the epidemic under control, and more businesses and factories resume operations, the buoyant economy in the long run will prop up the renminbi exchange rate. At the same time, as we can see in the financial market, the local-foreign currency interest rate spread stays within an appropriate range. Given China's adequate foreign exchange reserves, all these factors provide a strong foundation for the continuing stability of the renminbi exchange rate. Thank you!
Xuan Changneng
I'd like to also add some comments. We have noticed that due to the spreading of the COVID-19 epidemic, the international financial market is suffering from aggravated turbulence, and the market players tend to hedge against risks as the U.S. dollar index climbed rapidly. From March 10 to 19, the index jumped 6.8 percent. Although uncertainties in the world market are mounting, based on the renminbi exchange rate and the demand and supply in the foreign exchange market, we can say that the conditions to maintain overall stable cross-border capital flows are solid for the following reasons.
First, the rising U.S. dollar index is a result of the liquidity squeeze of the currency on the international market. It is a technical rise rather than a product of changing fundamentals of the economy. In the wake of the rapidly spreading COVID-19 epidemic, the market tends to hedge against risks, aggravating tension in the international market. As market players scrambled to recoup funds, the U.S. dollar faces a liquidity squeeze, in turn prompting a technical rise of the U.S. dollar index. As we know, the U.S. dollar accounts for quite a large share of global economic and financial activities in terms of pricing, settlement and transaction. This is the main contributing factor for the recent rapid rise of the U.S. dollar index.
Second, the renminbi is comparatively stable globally. As was elaborately explained by (vice) governor Chen, in contrast with the rapidly rising U.S. dollar index is the widespread downward pressure on global currencies. From March 10 to 19, the euro and the pound slumped 6.6 percent and 12.5 percent against the U.S. dollar respectively, and the emerging market currency index was down 3 percent. Over the same period, the renminbi exchange rate edged down 2 percent. It shows that the renminbi passively became weak due to stronger U.S. dollar, but the renminbi depreciated less than major international currencies including the euro and the pound and also less than currencies of the emerging economies. In the basket of currencies, the renminbi exchange rate went up by 2.7 percent during the period.
Third, supply and demand in China's foreign exchange market has remained generally balanced. In February, Chinese banks witnessed a surplus of US $14.2 billion in foreign exchange trading services and the non-banking sectors had US $9.6 billion in balance of international revenue and payment surplus. When share options and other long-term factors affecting market demand and supply are taken into account, we can say demand and supply in the foreign exchange market generally strike a balance. Corporate and individual market players always cash in foreign currency when the price is high and buy in when the price is low. It is rational trading behavior and also shows that the exchange rate, as a price factor, plays an effective role in adjusting market supply and demand. Since March, the balance of supply and demand in the foreign exchange market has continued.
In the short term, the liquidity squeeze of the U.S. dollar and the rising U.S. dollar index inevitably bring adverse effects on emerging economies, including China. In response, we will keep watching the trend and deal with the situation in a moderately proactive manner. In the medium and long term, the fundamentals of the Chinese economy and its currency and financial conditions will effectively prop up stable cross-border capital flows, the renminbi exchange rate will fluctuate in both ways in a rational range, and there is no conditions under which the renminbi will drastically depreciate.
(Vice) Governor Chen explained why this is the case. I want to stress the reasons here. First, with the COVID-19 cases brought under control, more businesses and factories resumed operations, trading activities were restored and macroeconomic policies put in place, showing that the real economy in China is gaining momentum.
Second, monetary authorities of some major foreign economies have set the nominal overnight interest rate close to or below zero percent, whereas China's monetary policy remains at a normal manageable range. As a result, the interest rate spread at home and abroad is big, which also means that the renminbi has greater value and appeal to be included in an investment portfolio globally.
As the U.S. Federal Reserve recently made two consecutive interest rate cuts, the interest rate spread of the renminbi against the U.S. dollar is widening. From February 20 to March 19, the daily interest rate spread of the 10-year government bonds between China and the U.S. averaged 1.72 percent, roughly up 40 base points from January. Therefore, the interest rate spread is conducive to maintaining the appeal and value of the renminbi in asset allocation.
Third, as the mechanism for renminbi exchange rate formation continues improving, the exchange rate becomes more flexible and the foreign exchange market grows more mature and could better adjust itself. We are capable of guarding against and dealing with risks arising from cross-border capital flows.
I believe under the leadership of the CPC Central Committee with Comrade Xi Jinping at the core, the epidemic control and the resumption of production will be advanced in a progressive and orderly manner, the long-term trend of robust economic growth will not change, and the goal of forestalling and defusing major financial risks will be achieved as scheduled.
Hu Kaihong:
The press conference ends here. Thank you all!
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