Both CNY and CNH rates soared on the first trading day after the Spring Festival, rebounding from previous positions this year. The central parity rate of RMB against the USD has increased 0.3 percent, the largest growth rate since Nov. 2, 2015.
Meanwhile, China’s trade surplus released yesterday soared to historical high, showing that China continues to maintain a great current account surplus, and it will ease the pressure from capital outflow and RMB depreciation. At this point, market suggests the central bank to consider cutting reserve requirement ratio (RRR) to release previously-accumulated pressure and supplement monetary base.
Both CNY and CNH rates soared
The central parity rate of RMB against the USD reported 6.5118 on Feb. 15, highest level since Jan. 4, and 196 base points higher than that of the last trading day before the Spring Festival. At 10 a.m., Feb. 15, onshore spot rate reported around 6.516 in the morning, with an obvious uptrend, and it further increased to about 6.49 in the afternoon.
In fact, the central parity rate of RMB against the USD has constantly soared since February, with a growth of 421 base points. Especially on the last trading day before the Spring Festival, the central parity rate reported 6.5314 on Feb. 5, about 100 points higher than that of the previous trading day. Meanwhile, Chinese yuan greatly increased in the offshore market during the Spring Festival, in which the onshore market was suspended, laying a favorable foundation for uptrend of Chinese yuan in the onshore market on the first trading day after the holiday.
Chinese yuan has soared by around 600 base points in the offshore market during the holiday. The exchange rate of RMB against the USD yesterday maintained an uptrend, opening at 6.5038. After that, Chinese yuan constantly increased, and fluctuated at around 6.49 in the afternoon.
Traders believed that the speech made by Fed chairwomen during the Spring Festival weakened the USD, and recent attitude of Zhou Xiaochuan, president of the central bank, also enhanced further appreciation of Chinese yuan, such as “no foundation for Chinese yuan to constantly depreciate” and “speculation being not allowed to over guide market sentiment”.
Depreciation pressure to ease for a short term
It is worthy to notice that China yesterday issued the trade data of January. Market risk preference has improved on the whole. In January, China’s export settled in Chinese yuan dropped by 6.6 percent year on year, out of market expectation. At the same time, bulk commodity prices declined, with import shrank 14.4 percent year on year. The trade surplus in January climbed to new high of 406.2 billion yuan (amount to 63.3 billion U.S. dollars).
According to Liu Ligang, Greater China chief economist at ANZ Bank, the new high of China’s trade surplus shows that China continues to maintain a great current account surplus, and it will ease the pressure from capital outflow and RMB depreciation. His comment is consistent with Zhou Xiaochuan’s previous attitude that “there is no foundation for Chinese yuan to constantly depreciate” and “China has no motivation to depreciate the currency just in order to expand net export”.
China Foreign Exchange Trade System (CFETS) yesterday released the RMB exchange rate index for Feb. 5, which was 99.23, down by 0.77 percent compared with that at the end of 2014. In order to present changes of effective exchange rate of Chinese yuan from various views, CFETS calculates the RMB exchange rate index based on BIS and SDR currency baskets. The two indexes were 100.31 and 97.12 on Feb. 5, 2016, up by 0.31 percent and down by 2.88 percent respectively when compared with those at the end of 2014.
Zhou recently stressed the importance to take a basket of currencies for reference in an interview, stating that “it is an inevitable choice for China’s trade and investment of various regions, partners and diversity, which had not been done enough before. We focused more on the U.S. dollar in the past, but we will rely more on a basket of currencies in next step”. “In the foreseeable future, reinforcing the strength to consider a basket of currencies is a main step for exchange rate formation mechanism of Chinese yuan, which means that exchange rates of the basket of currencies should be basically kept stable.”
After the Spring Festival, capital expired in the open market will reach 1.7 trillion yuan. Market players believed that the central bank can continue to make the liquidity smooth through short-term reverse repo. But under the background of capital outflow, the pressure of supplementing monetary base still exists.
According to market players, depreciation pressure faced by Chinese yuan has been eased to some extent along with gradually weakening U.S. dollar. Meanwhile, the central bank sends a message to the market that it pays attention to exchange rates of a basket of currencies, and such expectation management has been basically enhanced.
Based on monetary policies, the central bank previously considered that over-easing monetary policies may increase depreciation pressure on Chinese yuan; thus, its short-term policy target shifts to stabilizing the exchange rate, and maintaining the market demands for liquidity through a large number of short-term liquidity operations.
Zhou Hao, China economist at Commerzbank, suggested that China’s central bank should consider cutting the RRR at this time-point to release the pressure accumulated previously, and prepare for market fluctuation likely to occur in the future.