Central bank set to boost market confidence

China's central bank is expected to prioritize stabilizing market confidence in the coming quarter, keeping monetary policy accommodative for economic recovery while fending off any rapid weakening of the renminbi against the dollar, experts said on Thursday.

Their comments came as aggressive monetary tightening in the United States has sent the dollar index to a two-decade high and deflated nondollar currencies worldwide, including the renminbi.

After hitting 7.25 on Wednesday, its weakest level in 14 years, the onshore exchange rate of the renminbi recovered to 7.14 against the dollar as of Thursday afternoon, still shedding about 12 percent since the beginning of the year.

The People's Bank of China, the country's central bank, declared in a statement on Wednesday its commitment to defending renminbi stability as the "first-order requirement" for the foreign exchange market.

Following its quarterly monetary policy meeting, the central bank further vowed on Thursday to better manage expectations regarding the renminbi exchange rate, while reiterating its focus on stabilizing the macroeconomic situation by providing more substantial support for the real economy.

Experts said a weakening renminbi means that the central bank should perform a balancing act between tamping down domestic interest rate levels to stabilize economic growth and preventing such moves from lowering the yields of renminbi assets and intensifying the depreciation pressure.

Still, the PBOC has space for amplifying support for China's economy, thanks to the renminbi's stability against a basket of major currencies, they said, adding that solid economic momentum remains the fundamental anchor of foreign exchange market expectations.

Shao Yu, chief economist at Orient Securities, said the central bank still has room for further easing, given that the renminbi remains strong compared with major nondollar currencies by registering smaller losses against the greenback.

The renminbi's relative strength means the PBOC faces a trade-off between benefits and costs when deciding whether to implement forceful measures to stop depreciation of the renminbi against the dollar, experts said. Such moves would make the renminbi appreciate against nondollar currencies and hurt China's competitive edge on exports, they said.

Rather, the PBOC may focus on avoiding any rapid weakening of the renminbi against the greenback or constant one-way renminbi movements, which could shake market confidence, the experts said.

In Wednesday's statement, the central bank warned of speculation over one-way renminbi movements, which will inflict losses over time. This followed the PBOC raising the risk reserve requirement on currency forward trading from zero to 20 percent on Monday, making it more expensive to short the renminbi.

Ye Yindan, a researcher at the Bank of China Research Institute, said there is limited room for the renminbi to further depreciate against the dollar, thanks to a potential pickup in China's economic growth, which may accelerate to about 5 percent year-on-year in the fourth quarter from around 3.8 percent in the previous quarter.

Also, the robust condition of China's balance of international payments will provide fundamental support for the renminbi, with the country's current account surplus hitting $166.4 billion in the first half, up 43 percent year-on-year, the State Administration of Foreign Exchange said on Thursday.