Home » Intensive Policy Signals Aim to Protect the Stability of the RMB Exchange Rate and Boost Confidence

Intensive Policy Signals Aim to Protect the Stability of the RMB Exchange Rate and Boost Confidence

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Intensive Policy Signals Released to Protect Stability of RMB Exchange Rate

In an effort to boost confidence and maintain stability, the RMB exchange rate has received intensive policy protection in recent days. Following a strong rebound in late July, the People’s Bank of China and the State Administration of Foreign Exchange held a work conference for the second half of 2023, where they emphasized the need to strengthen and improve foreign exchange policies and maintain the stable operation of the foreign exchange market.

The Politburo meeting held on July 24 also underscored the importance of keeping the RMB exchange rate basically stable at a reasonable and balanced level. These strong policy announcements have had a significant impact on the foreign exchange market, adding confidence to the RMB exchange rate.

According to Wang Qing, the chief macro analyst of Oriental Jincheng, the central bank’s proposal to strengthen foreign exchange policies and prevent fluctuation in the RMB exchange rate signals that they will prioritize maintaining the stability of the exchange rate over the independence of monetary policy. This suggests that regardless of changes in the external financial environment, the central bank will take measures to prevent large inflows and outflows of cross-border funds.

Li Liuyang, an expert on foreign exchange research at CICC, believes that the positive tone set by the meeting of the Political Bureau of the Central Committee will not only improve domestic economic expectations and cross-border securities investment flows but also stabilize global demand and risk appetite. It is expected that relevant policy rules will be implemented in August.

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Looking back, the RMB exchange rate faced significant pressure in the first half of the year due to monetary policy divergence and weakening domestic economic expectations. However, since July, the momentum of RMB stabilization has become evident, with the exchange rate rebounding by approximately 1.5% against the US dollar.

With multiple positive signals converging, including policy support, market participants expect the RMB exchange rate to break out of the declining trend and stabilize or even recover. Lian Ping, Chief Economist and Director of the Research Institute of Zhixin Investment, anticipates a slight appreciation in the short term amid fluctuations.

Mingming, the chief economist of CITIC Securities, predicts that capital inflows into the stock and bond market will gradually increase as a result of policy signals. With the weak and volatile US dollar index, the RMB exchange rate is expected to remain relatively strong. However, the extent of subsequent appreciation will depend on the sustainability of economic recovery.

Nevertheless, exchange rate fluctuations are considered normal, and the recent release of exchange rate policy signals aims to guide market expectations and curb irrational behavior. Liu Guoqiang, deputy governor of the People’s Bank of China, emphasized that the exchange rate is affected by various factors and may rise or fall, but it will maintain two-way fluctuations and dynamic equilibrium.

Industry analysts believe that this also reflects a more mature mentality among foreign exchange market participants, who are responding to market fluctuations with rational expectations. As the market continues to evolve, maintaining stable and balanced exchange rates will remain a key focus for policymakers.

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