PBOC: Market decides yuan's exchange rate

Market forces play a decisive role in determining the renminbi exchange rate, while there is no straightforward relationship between exchange rate and current account, the People's Bank of China said on Thursday.

In a statement that elaborates on its views on the RMB exchange rate, the country's central bank reiterated that China adopts a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies.

The central bank said it neither targets a specific level for the RMB exchange rate, nor seeks to determine its longer-term trajectory. The focus is laid upon preventing short-term fluctuations in the exchange rate from undermining financial stability, in particular sharp depreciation within a short time.

According to the central bank, the RMB exchange rate has floated in both directions over the past two decades. It has experienced several cycles of appreciation and depreciation since 2010, with more pronounced two-way floating and greater flexibility.

"China has no need or intent to gain competitive advantages through currency devaluation, nor has it ever resorted to competitive devaluation," the PBOC said, adding that the country's trade growth is driven by its growing industrial competitiveness in the global market.

"Addressing global imbalances requires collective actions from all stakeholders," the PBOC statement said, as global economic imbalances are deeply intertwined with shifting global division of labor, inherent flaws in the international monetary system, and persistently high fiscal deficit and high consumption in some countries.

The central bank's views came amid discussions about global imbalances — a persistent state in which some countries run large, long-running current account deficits while other countries accumulate massive, ongoing current account surpluses — with some arguments citing exchange rate factors as a cause for global imbalances.

Objectively speaking, pinning down a precise equilibrium level is a formidable task, as assessment results from different models often vary widely, suggesting that no single method is sufficiently reliable on its own, the PBOC said.

The country's central bank said that there is no well-established methodology for evaluating the equilibrium level of exchange rates internationally as exchange rate dynamics are driven by a number of factors including economic growth, monetary policy, financial market, geopolitics and sudden shocks.

The International Monetary Fund's policy recommendations to China focus on structural adjustments such as actively expanding domestic demand — not on pushing RMB appreciation, the central bank added.

"Current account surplus does not necessarily imply currency undervaluation and the need for appreciation," the PBOC said.

According to the statistics from the PBOC, China's current account surplus accounted for 3.7 percent of its GDP in the first half, compared with 5 percent in Japan and 18.4 percent in South Korea. During that period, the Chinese yuan strengthened by 3 percent against the US dollar, while the Japanese yen weakened by 3.6 percent against the greenback while the South Korean won slid by 7.1 percent.

"When assessing exchange rates, one should not only look at trade in goods, but also trade in services; not only current account, but also financial account; and not only economic fundamentals, but also market expectations and other factors," the central bank said.

Echoing the central bank's views, Guan Tao, chief economist at Huafu Securities, said that China has a structural pattern of surpluses in the current account and net outflows in the capital account as a result of generally balanced international payments, drawing a parallel with the United States, where a structural trade deficit is accompanied by capital inflows.

Just as neither the trade deficit alone nor the inflows alone can predict the direction of the dollar, a trade surplus does not necessarily mean that the yuan will appreciate, nor does capital outflow reliably point to a weaker yuan, Guan said.

China has long been a contributor to global economic rebalancing, the PBOC added, with the country's current account surplus as a percentage of GDP fell sharply from its peak of 9.9 percent in 2007.

During the 15th Five-Year Plan period (2026-30), China will stay the course in transforming its economic growth model, expand domestic demand, improve business environment, deepen the high-standard opening-up, and pursue a more open, inclusive and balanced global economy, the PBOC added.

The PBOC said that attributing one's decline in industrial competitiveness, weakened fiscal discipline, and complicated structural issues simply to others' exchange rates is nothing but shifting the responsibility for adjustment onto others and dodging accountability.

zhoulanxv@chinadaily.com.cn