Exchange-rate liberalisation

China Foreign Exchange Reserves (US$ billions)

The People’s Bank of China’s decision to reform the country’s currency fixing mechanism on 11 August sent shock waves around the world. Wilfred Wee, portfolio manager in the Emerging Market Fixed Income team, believes that this move “was intended as a reform-oriented measure in line with China’s overall renminbi internationalisation agenda, and to facilitate the renminbi’s inclusion into the International Monetary Fund’s Special Drawing Rights basket.” However, Wee doesn’t expect any further major devaluations given the volatility that ensued in August and growth risk these reform experiments created. Instead, he believes, Beijing will continue to use other monetary policy levers, such as cutting bank reserve requirements and commercial banks’ deposit rates to ease liquidity. 

Over the next quarter we don’t expect to see any further material moves in the onshore renminbi exchange rate, as the People’s Bank of China has decided to re-peg the currency for the time being to stem capital outflows and give more room to manage domestic deleveraging.