China Shifts Approach to RMB Internationalisation

China has fundamentally changed its approach towards RMB internationalisation, according to BNP Paribas China’s chief China economist, XD Chen.

Speaking at a briefing in New York today, Chen explained that for the past five years the authorities in China had one main policy stance regarding the renminbi: to promote the internationalisation of the currency.

However, he then added: “But now this policy stance, in our observation and together with our policy consultation, is no longer. In other words, they’re not going to use the government’s force to promote renminbi internationalisation, instead they will follow market forces.”

Giving an example of how market forces are already driving increased RMB internationalisation, Chen pointed out that more RMBdenominated futures products, particularly for commodities, have been introduced in China in recent years, and that this is inevitably increasing the overall weighting of international commodities like oil, iron ore and copper that are being priced in RMB. 

Elsewhere during the briefing, Tianhe Ji, a China FX and rates strategist at BNP Paribas China, predicted that the RMB would see less volatility in 2019 than last year.

“The pressure on the renminbi now is less than last year,” said Ji, pointing out that the US dollar has recently weakened against a number of currencies, tensions between Chinese president, Xi Jinping, and US president, Donald Trump, appear to have thawed somewhat, and there are signals that progress is being made on the trade negotiations between the two countries.

He continued: “For the USD/RMB exchange rate, this year will be a year of range trading, it will be within a band. We’ve seen a synchronised slowdown in the major economies, not just in China but also in the EU and perhaps now in the US itself…this means that the USD/RMB exchange rate has no particular direction.”

Ji also noted: “Because of this synchronised slowdown, the renminbi is enjoying no support from the euro. Remember, in 2017, the strength of the euro was one of the main drivers of renminbi performance. This year, as the European economy is slowing down, the support to the renminbi of a strong euro is much less. This makes us believe that USD/RMB won’t be weaker, but also that the renminbi won’t appreciate too much, so it will move in quite a stable way.”

Last year the People’s Bank of China (PBoC) introduced “counter-cyclical” measures to maintain the value of the RMB, but Ji predicts that the central bank is waiting for a good time to remove these measures in the FX market, although he adds that it is not in a rush to interfere with the market.

“The central bank is a little further from the market than it was, they’re letting the market balance,” he said.

Chen explained that central bank action in the FX market in China is driven on two different levels. On one level, it is driven by political considerations, and Chen said that the current government policy stance is to avoid a volatile RMB and to not rock the ongoing US/China trade talks. The second level of consideration, he explained, is the practical daily operation of the currency.

One key thing to note though, according to Chen, is that PBoC FX intervention is driven by political policy markers, not by the central bank itself.

“In general, the currency stance is set by the top leaders. Nowadays, China’s policy decision maker is the Politburo, not the PBoC. The PBoC is there for the implementation,” he said, adding, “I think at this stage the top Chinese policy makers are comfortable with the currency.”

Galen Stops

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