China Allowing the Middle Price of RMB to Devalue by 2%

China Allowing the Middle Price of RMB to Devalue by 2%
Photo Credit:Corbis/達志影像

What you need to know

The China Foreign Exchange Trading System announced the middle price between RMB and USD has devalued nearly 1.9 percent and US$ 1 now equals RMB$ 6.2298. People are saying this is the doing of The People's Bank of China to encourage export.

The exchange rate of the Chinese currency, RMB, hit its biggest decline ever this morning. The China Foreign Exchange Trading System announced the middle price between RMB and USD has devalued nearly 1.9 percent and US$ 1 now equals RMB$ 6.2298. People are saying this is the doing of The People’s Bank of China to encourage export.

China has been going through a series of pragmatic economic data, and exporting has been weaker than anticipated. The PMI of the manufacturing industry has even dropped to the lowest point since March in 2014.

The People’s Bank of China finally made a move this morning, allowing the middle price between RMB and USD to devalue approximately 200 basis points (as opposed to the closing of RMB$6.2097 the previous day).

The bank says this is the perfect middle price and believes the market will need some time to adapt to the adjustments. It will examine the market closely to stabilize market expectations.

The bank’s statement points out in order to refine the middle price between RMB and USD and enhance the degree of marketization, starting from August 11, the middle price will be determined by the following three factors:

1. Referencing the closing rate of foreign currencies from the previous day.
2. The supply and demand of foreign currencies.
3. Considering the changes in the most prominent world currencies to propose a middle price offer to the China Foreign Exchange Trading System.

When asked why it chose this moment to make the move, the bank says the market expects the US Federal Reserve System will raise interest rates this year and the USD will become stronger. The currency devaluation of emerging economies and commodity producers along with the large fluctuations of international capital flows build a complicated situation. China’s market continues to maintain a larger surplus and the RMB exchange rate is relatively stronger than other currencies, therefore there is a need to further improve the middle price.

The bank also says that the formation mechanism of the RMB exchange rate will continue towards marketization. Future measures include extending trading hours, introducing qualified overseas investments, promoting an unified RMB currency rate and enhancing the flexibility of the RMB.

At the same time, it will reinforce monitoring and crack down on money laundering, tax evasion, underground banks and other related activities.

Translated by Olivia Yang

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