Rapid appreciation of RMB unsustainable: senior researcher

A staff member displays the banknotes and coins included in the 2019 edition of the fifth series of the renminbi at an Industrial and Commercial Bank of China (ICBC) branch in Beijing, capital of China, Aug. 30, 2019. (Xinhua/Chen Yehua)

BEIJING, May 30 (Xinhua) -- The rapid appreciation of the RMB is unsustainable, and also not in line with the domestic and international economic and financial situation, a senior Chinese researcher and former central bank official told Xinhua on Sunday.

The current rapid appreciation of the Chinese yuan against the U.S. dollar may have overshot, said Sheng Songcheng, professor of economics and finance with China Europe International Business School and former director of the surveys and statistics department at the People's Bank of China (PBOC).

The U.S. dollar index has fallen by 2.2 percent in the past month and a half, while the euro has strengthened against the greenback by 2.3 percent and the Japanese yen has weakened by 0.4 percent, but the RMB has appreciated by 2.9 percent, said Sheng.

The U.S. dollar index is less likely to decline further, and the exchange rate of the RMB against the U.S. dollar should also be relatively stable according to market rules. But the RMB exchange rate has hit record highs recently, jumping above 6.4 to the greenback, which indicates that there is an overshoot in the market, Sheng said.

Sheng predicts that the rapid appreciation of the RMB is unsustainable, as the U.S. economy is expected to rebound in the second half of the year, and the U.S. dollar may strengthen accordingly, while the narrowing interest spread between China and the United States may weaken the momentum of hot money influx.

Meanwhile, the strengthened RMB cannot offset price hikes for bulk commodities, and it cannot be used as a tool, said Sheng, noting that the RMB exchange rate overshoot is only short-term speculation.

China encourages long-term capital investment, but it should prevent a large inflow of short-term capital, which will push up the RMB exchange rate, weaken the competitiveness of export enterprises and disrupt the independent implementation of China's financial market and monetary policy, said Sheng.

China has sufficient policy tools to use, Sheng said. Since October last year, the PBOC has adopted policies and reforms on the basis of supply and demand in the foreign exchange market to guide the basic stability of the RMB exchange rate at a reasonable and balanced level.

The foreign exchange risk reserve ratio for forward foreign exchange trading has been lowered from 20 percent to zero since Oct. 12 last year, while some banks have phased out the use of the "counter-cyclical" factor in the pricing mechanism of the yuan's central parity rate against the greenback since Oct. 27 last year.

Besides these moves, the central bank can take other macro-prudential adjustment measures to maintain the two-way balanced flow of cross-border funds, he said.

The central bank has improved a managed floating exchange rate regime based on market supply and demand and with reference to a currency basket, and this regime is suitable for China's national conditions at present and for a long time to come, he noted.

The central bank has reiterated efforts to be firm with the floating exchange rate regime, appropriately guide market expectations, give full play to the role of the exchange rate as an automatic stabilizer in adjusting macro economy and international payments, and keep the RMB exchange rate basically stable, he said.

Sheng said he believes the central bank will focus on the guidance of market expectations, while the trend of the RMB exchange rate will continue to depend on market supply and demand, as well as changes in the global financial market.