This week in renminbi: Ex-IMF economist calls for central bank independence, PBoC mulls RMB trading band change, China-Africa trade surges

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RMBi:

  • China needs an independent central bank to promote renminbi internationalisation, said Eswar Prasad, a former economist at the International Monetary Fund (IMF) on August 4.

While Prasad recognised China’s inclusion in the IMF’s Special Drawing Right basket of major currencies in 2016 as a remarkable achievement, he said renminbi internationalisation will have limited room for progress if China fails to develop an independent central bank and bolster the rule of law.

“One could argue… that the renminbi does not meet the traditional prerequisites of a reserve currency, but it has become a reserve currency, and one that is playing a big role in international financial markets,” said Prasad.

Prasad also noted that making the renminbi more freely convertible is not just about projecting China’s power abroad, but changing the policy direction at home as well.

“For many pro-reform-minded policymakers in China, the notion of the renminbi becoming a major global currency is not an end in itself,” said Prasad. “It serves a very useful purpose in providing a framework for getting around opposition to domestic reforms.”

FX:

  • The PBoC may allow the renminbi to rise or fall as much as 3% against the dollar in a single day – up from 2% at present – by the end of this year, according to an August 3 media report. The change could come after the 19th Communist Party congress in the autumn, the report cited sources as saying.

A widening trading band would allow the renminbi to better brace for volatility in the dollar, said Christy Tan, head of markets strategy and research for Asia at National Australia Bank.

“We expect the policy focus on the RMB index to mean a greater tolerance for USDCNY flexibility,” Tan wrote in an August 7 note. “In the months ahead, any movements in the broad USD will probably be matched in direction with the RMB, albeit in an asymmetric low beta fashion.”

But Tommy Xie, economist at the Oversea-Chinese Banking Corporation (OCBC), said tinkering with the trading band is not a priority for Chinese policymakers.

“We see no urgency for China to widen its currency trading band,” Xie wrote in an August 7 memo. “The 2% trading band has not been touched since the fixing mechanism reform in 2015.”

  • The PBoC’s renminbi fix against the dollar was set at 6.7228 this morning, 96bp weaker from Friday. In the spot market, the CNY was trading at 6.7243 as of 10.38am, with the CNH at 6.7300, up 0.06% and 0.08% from their previous close, respectively, according to Bloomberg data.

The dollar index was trading at 93.354 as of 11.19am, down 0.2% from the previous close, according to Bloomberg. The Thomson Reuters CNY reference index closed at 94.13 on Sunday, up 0.32% from its previous close.

The trade-weighted index by CFETS closed at 92.86 on August 4, up 0.12% from the previous week, with the BIS basket and special drawing rights basket at 93.56 and 93.54, down 0.05% and 0.22%, respectively.

Belt and Road:

  • Chinese insurance companies have invested about Rmb699.4bn ($104.03bn) in Belt and Road projects through equities, bonds and funds in the first half of 2017, according to China Insurance Regulatory Commission on August 3.

Trade:

  • China recorded $85.3bn of trade with Africa in the first half of 2017, according to the Ministry of Commerce (MofCom) on August 3. This marked a year-on-year growth of 19% and reversed the fall in trade volumes since 2015, according to a MofCom spokesperson.

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