Renminbi on track for stability against USD

Expert believes PBOC poised to secure yuan from excessive fluctuations

The renminbi is still on track for overall stability with two-way fluctuations against the US dollar in the months ahead, and with limited risks of one-sided and substantial appreciation, said a leading currency expert.

After the Fed's rate cut and China's stimulus package fueled a rally in renminbi-denominated assets, with the offshore renminbi strengthening past the 7-per-dollar milestone in late September, talks about the possibility of a drastic renminbi appreciation have emerged.

Referring to this very issue, Guan Tao, global chief economist at BOCI China, said: "There's a possibility for everything. But, first and foremost, market forces dictate that the renminbi exchange rate would fluctuate in both directions amid uncertainties and instabilities internally and externally.

"Market expectations are constantly shifting between scenarios of a US economic soft landing, hard landing and even 'no landing' — which means the US economy stays overheated and sees a second wave of inflation. The Fed's monetary policy will adjust its pace accordingly.

"Meanwhile, the People's Bank of China, the central bank, seems always ready to prevent the renminbi exchange rate from overshooting, either excessive appreciation or depreciation. The central bank has arguably accumulated rich experience in this regard," Guan said in an exclusive interview with China Daily.

Pan Gongsheng, governor of the PBOC, said last month that the central bank adheres to the decisive role of market forces in exchange rate formation and will strengthen expectation management to avoid exchange rate overshooting.

According to Guan, who once served as head of the Balance of Payments Department at the State Administration of Foreign Exchange, a US economic soft landing remains the base case scenario following the Fed's 50-basis-point rate cut in September. In that case, as the Fed continues rate cuts, foreign institutions may continue to boost holdings in renminbi-denominated bonds.

By contrast, in a "no landing "scenario — which seems more likely than a hard landing, the Fed may resume tightening and dampen risk appetite, Guan said, adding it remains uncertain whether the renminbi will end stronger than the 7-per-dollar mark by the end of the year.

After US job gains in September beat market expectations last week, traders began to bet that the Fed will slow down rate cuts in the rest of the year, sending the US dollar index rebounding.

The offshore renminbi has retreated to 7.06 against the greenback as of Monday evening, compared with the recent high of 6.97 in late September and 7.3 in early July when the renminbi started the rally.

Guan said the recent yuan rebound has helped shatter expectations that the yuan could perform relatively weaker against the dollar persistently, alleviated the pressure of capital outflows and expanded the scope for China's monetary policy to support the economy.

After cuts to the reserve requirement ratio and interest rates last month, Guan said the country's monetary policy is still within a conventional range and has room for maneuvering on the fronts of both quantity and price.

He also urged that fiscal policy should synergize with accommodative monetary moves. Measures such as expanding this year's government deficit to boost fiscal spending and optimizing the fiscal spending structure to improve people's livelihoods are necessary, especially given households' reluctance to consume and invest due to debt burdens.

Guan added that international gold prices still have room to rise in the cases of a US economic soft landing and hard landing, thanks to declining US yields and the demand for hedging against elevated inflation and geopolitical tensions.

It is possible for international gold prices to reach $3,000 per ounce, Guan said, with global central banks' increased gold reserves contributing to the trend.