The People’s Bank of China has introduced bigger movements in its daily fixings of the country’s currency against the dollar. If sustained, this subtle change could signal that the central bank is preparing to allow greater flexibility in foreign exchange trading.

Author: Gordon Platt

Joey Chew, Asian foreign exchange strategist for HSBC in Hong Kong, says: “The daily USD-CNY [dollar to Chinese yuan (renminbi)] reference rate has become more driven by spot CNY movements and major currency trends, and less by policy discretion. This could be a positive step toward a more market-driven exchange rate regime.”

Meanwhile, the renminbi will become more widely used and traded globally, given China’s economic clout, the opening of its financial economy and official support from within China, as well as the International Monetary Fund for renminbi internationalization, Chew says. “In the near term, however, the pace of the change could be partly affected by cyclical factors, such as a slowdown in China’s trade flows,” he says. “But we are confident of the longer-term structural direction.”

The latest SWIFT data (February 2016) show the renminbi has reached 37% adoption across financial institutions worldwide for payments with China and Hong Kong. That’s up 18% in the past two years.

HSBC Global Research says it believes China remains firmly committed to capital account liberalization. After the sudden depreciation of the renminbi at the beginning of this year, the currency has stabilized, although HSBC does not expect the calmness to remain for long. Its year-end forecast for dollars to renminbi is 6.9, versus 6.46 in mid April.

Depreciation pressures on the renminbi remain strong, Chew says. The Federal Reserve could raise rates twice this year, while China still has ample room to ease, he says. HSBC’s China economists are calling for a half-point cut in the policy rate this year. “This [rate differential] will set the basic tone for a weaker renminbi against the dollar,” Chew says.                               


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