China's recent adjustment to the RMB's exchange rate mechanism was "reform-oriented" rather than aimed at boosting exports, and continuing depreciation conflicts with the country's policy goal of RMB internationalization, banking giant HSBC said Tuesday.
China on Aug. 11 took a big step toward RMB liberalization through measures to reform its currency fixing mechanism. The RMB weakened about 3percent in the following two days before stabilizing on increased assurance from the central bank. Some have seen this as the beginning of policy-driven devaluation to support growth, the bank said in a report.
"We disagree. We believe the move was reform-oriented and not intended to stimulate export growth. Depreciation is difficult to maintain on an effective exchange rate basis, as outright depreciation is often offset by the compensatory moves of other currencies," noted the report.
It also runs counter to another of Beijing's main policy goals: RMB internationalization. Policymakers have more effective tools on both the monetary and fiscal fronts to support economic growth, said HSBC.
Although it makes for a convenient story, exchange rate appreciation is not the main reason behind export weakness in 2015, said the report, adding weak global demand is the main culprit.
Demand from the United States has weakened over the past two years, while demand from the eurozone rose in the second half of 2014 and plateaued in 2015, it noted.
Effective beginning Aug. 11, daily central parity quotes reported to the China Foreign Exchange Trade System before the market opens should be based on the previous day's closing rate of the inter-bank foreign exchange rate market, supply and demand, and price movements of major currencies.
