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E-mail China.org.cn, October 18, 2024
Market News International:
The Federal Reserve cut rates by 50 basis points this month. Does this create room for further easing in China's monetary policy, and how will the People's Bank of China assess the impact of the Fed rate reduction on China's foreign exchange market?
Pan Gongsheng:
Thank you for your questions. Recently, major economies have adjusted their monetary policies. As we see, the depreciation pressures on the RMB have notably eased, and the currency has started to appreciate. On Sept. 18, the U.S. Fed cut interest rates by 50 basis points, marking the first rate reduction amid its interest rate hike cycle over the past few years. Meanwhile, central banks of several other countries have also cut their interest rates. For example, the European Central Bank (ECB) has reduced its interest rate twice since June, by a total of 50 basis points; the Bank of England (BoE) lowered rates by 25 basis points in August; and the central banks of Canada and Sweden also cut their interest rates. The monetary policies of major economies, except for Japan's central bank, have all shifted to a rate-cutting cycle, weakening the U.S. dollar's appreciation momentum. The dollar index has generally declined, decreasing by 3% since August and currently fluctuating at around 101. As the periodical divergence in monetary policies between China and foreign countries narrows, external pressures affecting the general stability of the RMB exchange rate have significantly eased. On Sept. 23, the RMB-to-U.S. dollar exchange rate reached approximately 7.05, reflecting a 2.4% appreciation since August.
The exchange rate reflects the comparative value of currencies and can be affected by multiple factors, including economic growth, monetary policy, financial markets, geopolitics and emergencies. All these elements can impact the exchange rate.
From an external perspective, uncertainties in the global environment and the U.S. dollar's trajectory persist. These are influenced by factors such as diverging economic growth among countries, geopolitical shifts, including the U.S. presidential election, and fluctuations in global financial markets.
Considering China's domestic situation, we believe the RMB exchange rate maintains a relatively stable foundation.
First, from a macroeconomic perspective, China's economic recovery and steady growth momentum are expected to further consolidate and strengthen. The strong monetary policy introduced by the PBC will support the real economy, boost consumption and enhance market confidence.
Second, China has maintained a basic equilibrium in its balance of payments. In the first half of the year, the ratio of the country's current account surplus to its GDP reached 1.1%, which is considered to be within a relatively appropriate range.
Third, the PBC and the State Administration of Foreign Exchange (SAFE) have placed great importance on the development of the foreign exchange market. This market has seen increasingly mature participants, more rational trading behaviors and significantly greater resilience. In the first half of the year, the proportion of import and export enterprises engaging in hedging reached 27%, while 30% of foreign trade in goods used RMB for cross-border settlements. These two figures don't overlap. Combined, they suggest that about 50% of Chinese enterprises involved in foreign trade and exports are relatively insulated from exchange rate risks. As the PBC has repeatedly stated, with the RMB exchange rate floating more freely, market participants should view rate fluctuations rationally. They should strengthen their "risk-neutral" philosophy and avoid speculation on exchange rate trends and unilateral movements. Enterprises should focus on their core business, while financial institutions should continue to provide sound services that support the real economy.
The PBC's stance on exchange rate policy is clear and transparent, with several key points: First, we uphold the market's decisive role in determining exchange rates while maintaining their flexibility. Second, we are strengthening efforts to guide market expectations. This includes preventing the foreign exchange market expectations from becoming unanimously one-sided and self-fulfilling. We also work to prevent exchange rate overshooting risks, maintaining the RMB's general stability within an appropriate and balanced range.
Thank you.
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