In what appears to be a deliberately timed missive to the markets, officials from the People’s Bank of China noted to us that the offshore Renminbi strengthened beyond the psychologically important level of 6.5000 against the US Dollar this week, briefly hitting 6.4927, and marking its strongest level since June of 2018.
And yesterday, China’s Foreign Exchange Trade System set the RMB central parity rate at 6.5311 against the USD, the strongest level again in over two and a half years, representing an 8% gain against the USD for 2020.
Central bank sources maintain that while the 6.5000 level has been considered a psychologically important threshold for markets, a “relatively strong” RMB does not seem to have had a material negative impact on the country’s economy yet.
China’s exports have remained resilient over the past seven months, and the domestic market is pricing rosy recovery prospects on the back of the country’s “dual circulation” growth strategy that is focused mostly on domestic consumption growth (see SGH 8/3/20, “China: Bringing it all Back Home”).
Furthermore, RMB strength is seen as a vote of confidence by foreign investors on China’s continued growth and recovery prospects, and is to be expected under a policy of allowing the RMB to fluctuate more freely as part of the broader push for the internationalization of the currency and financial sector reform.
But having said all that, and reiterating that the PBoC will not intervene directly in FX markets, we suspect the more pointed message is in the off the record “expectation” by a senior official that he does not see the RMB ending the year stronger than 6.5000.
Indeed, even while disavowing direct intervention, sources indicate that if the RMB were to surge too fast, the central bank would take measures to counter that trend.