August 04,2008
Last week, as the Chinese government decided that securing economic growth trumped inflation abatement, the RMB exchange rate saw its biggest fall since the beginning of exchange rate reform in July, 2005. And the slump continued on Monday.
The rate of RMB against the USD opened at 6.8163 last week, and closed at 6.8420, slumping by 257 basis points.
In the non-deliverable forwards market, RMB/USD exchange rate of all terms dropped, indicating the market’s weakening expectation for RMB appreciation. It is estimated that this week the RMB/USD exchange rate may fluctuate and perhaps drop slightly further.
Last week, the People’s Bank of China (PBoC) declared the establishment of the Exchange Rate Department, which is supposed to deepen the reform of the foreign exchange management system and reinforce supervision over cross-border capital flow, adding stability to China’s exchange rate policies.
Judging from the press release from PBoC’s second quarterly meeting, to ensure a steady economic growth and protect exports it has probably given using rapid RMB appreciation to curb inflation.
Even if the RMB/USD exchange rate still maintains its original trend for the rest of the year, appreciation will be limited. If the total annual appreciation is 10%, then for the rest of the year it will be only 3.5% or lower.
Meanwhile, with the continuous rebound of the USD in the international market, the RMB exchange rate against euro and other currencies may grow considerably.
On another front, aiming to prevent a large export decline and operational troubles for some firms, last week the Ministry of Finance and State Administration of Taxation lifted the tax rebate for some export textiles and clothing from 11% to 13%, and canceled the export tax rebate for some raw materials.