Experts back PBOC: Short-term pressures hold no long-term concerns

Although the renminbi might continue to face downward pressures against the US dollar in the short term, the Chinese currency is capable of maintaining overall stability and may bounce back by the end of the year, currency market experts said on Tuesday.

Having reduced the required foreign exchange reserves of financial institutions on Monday, the People's Bank of China, the country's central bank, still has abundant policy tools to stabilize market expectations of the renminbi exchange rate, they said.

The exchange rate of the onshore renminbi against the dollar weakened to 6.96 on Tuesday, hitting a fresh two-year low and shedding about 2,000 basis points since mid-August.

Experts attributed the renminbi's weakening mainly to a strong dollar. This in turn resulted from the US Federal Reserve's ongoing interest rate hikes and a weaker European economy that has further pushed the dollar index higher, which touched a 20-year high of 110 on Monday.

With the Fed expected to impose aggressive rate hike of 75 or 50 basis points this month, the renminbi may continue to feel the pressure from a strong dollar in the very near future, experts said.

In the medium term, however, the renminbi may bounce back thanks to a potential abatement of the dollar's strength as well as China's solid trade surplus, continuous economic recovery and ample policy tools to maintain currency market stability, they said.

"There is no need to be too worried about the depreciation risk to the renminbi," said Wang Tao, head of Asia economics at UBS Investment Bank.

Despite the renminbi's recent weakening against the dollar, the Chinese currency has appreciated against other major currencies like the euro and the Japanese yen, meaning that the renminbi has largely held its strength without excessive depreciation, Wang said.

Looking ahead, she said a strong greenback may further send the exchange rate of the renminbi against the dollar lower, which might drop below the 7-per-dollar level.

However, the rate may rebound to about 6.9 by the end of the year because China maintains a solid trade surplus while the dollar's strength is expected to fade over time as the Fed may turn less hawkish upon slowing US inflation and economic growth, Wang said.

The comments came in as the PBOC announced on Monday that it would reduce the foreign exchange reserve requirement ratio from 8 percent to 6 percent, effective Sept 15.

The cut, which will reduce the amount of foreign exchange deposits that financial institutions must keep as reserves, is seen by some experts as a signal that the central bank is ready to take concrete measures to prevent any excessively rapid renminbi depreciation.

Such a policy signal has been reinforced by remarks of Liu Guoqiang, deputy governor of the PBOC. Noting that two-way fluctuations of the renminbi should be a kind of normalcy in the short term, Liu ruled out the possibility of one-way movements dominating the renminbi exchange rate.

"A reasonably balanced and generally stable renminbi is what we are happy to see, and we are able to support it," Liu said at a news conference on Monday.

Cheng Qiang, chief macroeconomic analyst at CITIC Securities, said the PBOC has still ample tools to stabilize the renminbi if needed, such as the countercyclical adjustment factor and the reserve requirement ratio on the trading of foreign-exchange forward contracts.

Monday's cut may inject $13.5 billion in dollar liquidity into the market. Although this amount is not big, the move can boost market confidence in the renminbi in the short term by declaring the central bank's focus on stabilizing the currency, Cheng said.

In the medium term, the room for further renminbi depreciation against the greenback should be limited, given that the US economy is gradually entering a recession while the Chinese economy is likely to see a moderate recovery, Cheng said.