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HSBC’s analysts point out that China is adopting an enlightened “crisis mode” foreign exchange policy. They argue the RMB’s effective appreciation has slowed, probably due to importers’ USD purchases, financial flows and the recent PBOC’s monetary easing.

Key Quotes: 

“The renminbi has underperformed the reference basket of currencies. The China Foreign Exchange Trade System (CFETS) RMB index (which reflects the RMB exchange rate against 24 currencies) fell to 94.38 on 10 April from 95.73 on 20 March (source: CFETS) despite the pullback in the US dollar index (DXY) since mid- March. This is consistent with what we described as an enlightened “crisis mode” FX policy: allowing flexibility in USD-RMB but also keeping RMB overvaluation in check. Such a policy is feasible as long as the EUR-USD holds its range around 1.10, in our view.”

“The underperformance of the RMB against the basket of currencies is driven by a combination of stronger USD demand from importers and locals, and a temporary weaker RMB demand from foreigners, in our view. Importers are buying USD-RMB on dips, while locals are buying more overseas assets, and there has been a temporary slowdown in foreign inflows to the onshore market. The recent catch-up of the People’s Bank of China’s (PBOC) monetary easing, by cutting the interest rate on excess reserves (IOER rate), is also helping to slow the RMB’s effective appreciation.”

“If the USD is soft in the near term, USD-RMB may drop below 7.0 sooner rather than later. But a two-way FX market is likely to be the new normal, as it best serves China’s current macro-economic conditions, in our view.”