Renminbi slides to its weakest level since the global financial crisis
Allowing the renminbi exchange rate to float more freely could be a wise choice for China, against the backdrop of trade conflicts and economic downside risks, according to experts.
By analyzing the recent signals from the authorities, as well as market performance, they believed that the government much preferred a freer renminbi, or allowing the market to decide its value.
It seems like a dilemma is facing the monetary authority: to defend the currency by tightening liquidity, which may lead to credit defaults and the fast bursting of asset bubbles; or to tolerate a relatively weaker currency against the U.S. dollar, but ensuring a low interest rate level could sustain strong economic growth.
Experts, at the same time, are concerned that further tightening the monetary environment could hurt asset prices, especially housing prices.
"You don't need to make the renminbi stronger than it should be, as the U.S. dollar is surging in its value, when money is sucked into the U.S. amid the interest rate hikes and monetary policy normalization," said Huang Yukon, senior associate of Asia Program at the Carnegie Endowment for International Peace (CEIP) and the former World Bank China director.
On Tuesday, the renminbi slid to its weakest level since the global financial crisis. Its daily reference rate, which bands the onshore renminbi's moves within 2 percent on either side, dropped to 6.9574 per dollar, the lowest in more than a decade.
For a long time the market has been afraid that the renminbi may slip lower than 7 per dollar, a psychological threshold for foreign exchange rate traders as they may sell off more rapidly when the renminbi drops below that, although it has almost no meaning for the real economy.
"To set a certain threshold is unnecessary, and 7 per dollar is not the target of the central bank," said Gao Haihong, an economist at the Chinese Academy of Social Sciences. "The main focus of the monetary policy is domestic targets, especially to stabilize growth and demand."
Some experience has shown that, when the monetary authority chooses to target an exchange rate within a certain range, interest rates and conditions in the domestic economy must adapt to accommodate this target, and domestic interest rates and money supply can become more volatile.
As the U.S. Federal Reserve is expected to implement the fourth rate hike this year in December, some analysts speculated that the narrowed China-U.S. interest rate gap may trigger more capital outflows from China, and increase downward pressure on domestic asset prices.
"Compared with a currency under pressure, the bursting of an asset bubble is a more serious problem, and policymakers need to be very careful about the monetary policy, to prevent tightening too much," said Yoshiki Takeuchi, director-general of the International Bureau of Japan's Ministry of Finance.
"If the policy is too tight, people will expect a bubble to burst in the property market," said Takeuchi. "Japan used to raise the interest rates and constrain money coming into the banking sector, but it was too hasty in doing so, which has led to the property market slump."
As domestic consumption is now leading the Chinese economy, stabilizing property prices is important, said the Japanese official.
Besides, a good method to avoid bubble bursts is not to make bubbles. It requires policymakers to continually push forward the deleveraging process, and to control debt growth at a lower pace, said analysts.
Amid the trade tensions, China's domestic demand is growing significantly faster than in its trading partners, thus its imports tend to outpace exports. The country's current account balance is subject to downward pressure.
"The shrinkage of the current account surplus will be a constraint on the policy stance with regard to capital opening in general and financial outflows in particular," said Louis Kuijs, head of Asia Economics at Oxford Economics. "It will have an impact on views regarding financial stability, onshore renminbi sentiment and the policy approach to capital account opening."