Zhou Xiaochuan: not allow speculative forces to dominate market sentiment

As the Spring Festival holiday draws to a close, Zhou Xiaochuan, governor of the People’s Bank of China, made in-depth comment on the
exchange rate reform, macro-prudential policy framework, digital currency and etc. during an exclusive media interview, and RMB exchange rate reform was highly prioritized. Industrial insiders believe that the statement by Zhou demonstrates the central bank’s determination in stabilizing exchange rate in the short run, and shows that equal importance has been attached to macro-prudential policies and monetary policies for guarding against systematic financial risks.

The RMB exchange rate suffered great fluctuation in the past half a year against previous steady trend, triggering various speculations in the market. Zhou regarded it as a lagged adjustment since other currencies went through adjustment earlier.

Lu Zhengwei, chief economist with Industrial Bank Co., Ltd. and Huafu Securities Co., Ltd., believed that the saying of “lagged adjustment” suggests that the central bank admits the necessity of adjustment for RMB. It is unrealistic to hope that the exchange rate of RMB will remain “particularly steady”. The statement by Zhou on the mid and long term trend of the exchange rate implies that the RMB will experience fluctuation and adjustment in the mid and long run, and there is no basis for continued devaluation of RMB.

Zhou stressed again that there will be no fight of exchange rates. Given the speculations on foreign exchange markets in recent period and the sentiment fluctuation in the short term, Zhou stated that the central bank will not “allow speculative forces to dominate the market sentiment”. Ren Zeping, managing director at Guotai Junan Securities Co., Ltd., held that it shows the central bank’s determination in stabilizing exchange rate. Considering that the U.S. dollar index climbed to a peak during the Spring Festival holiday, the pressure on RMB devaluation eases in the short run.

It is noteworthy that though the central bank repeatedly stated that the reform of RMB exchange rate will not be changed, Zhou remarked that the timing of the reform is quite important. “Reform involves timing, coordination and implementation.”

When is the time window for the reform? Lu believed that according to analysis made by Zhou, first of all, the “spillover effect” must be eased. Negative spillover effect should be reduced to the utmost extent. Especially that no overlapped effect is expected in the international market; spillover strike also exist among domestic stock market, bond market, foreign exchange market, currency and etc., therefore cross infection and strike among domestic financial markets must be prevented to guard against systematic risks. Lu indicated that “it means that the reform in the foreign exchange market might not be launched when international or domestic markets obviously fluctuate, while the reform on RMB exchange rate might set sail again as international markets and other markets gradually stabilize.”

Secondly, wait till the adjustments end. Lu claimed that foreign trade enterprises will adjust the timing of their settlement and purchase of foreign exchange while domestic enterprises will improve their liability structure when the market expectation on RMB devaluation is relatively weak. The exchange rate reform can be quickened when the two “adjustments” get no deeper.

But Lu also emphasized that once the expectation on RMB exchange rate reverses, enterprises will correct their allocation of currencies and might further increase their assets denominated in U.S. dollar, showing that it’s quite hard to control the situation during this period.
Zhou also stressed during the exclusive interview that no all-round control will be imposed over capital projects; strengthening the macro-prudential policy framework is one of the targets of the new round of financial supervision system reform; it is an irresistible trend to establish the issuance and circulation system of digital currency.