Commentary: China's central bank sends clear signal on RMB exchange rate

BEIJING, June 1 (Xinhua) -- As the exchange rate of the Chinese currency renminbi (RMB), or the yuan, remains high against the U.S. dollar, the People's Bank of China (PBOC) has sent a series of clear signals that rapid appreciation of the yuan is not sustainable.

The latest policy move came on Monday with the PBOC, China's central bank, raising the reserve requirement ratio for foreign currency deposits by 2 percentage points from the current 5 percent to 7 percent, beginning June 15. That will put pressure on the yuan to weaken.

Sheng Songcheng, a professor at China Europe International Business School and a former director of the central bank's Department of Investigation and Statistics, on Sunday told Xinhua in an interview that the RMB has likely experienced some overshooting against the U.S. dollar, which will be unsustainable in the future and is not in line with the domestic and international economic and financial situation.

Sheng noted that the U.S. economy is expected to rebound comprehensively in the second half of the year, and that the dollar may strengthen accordingly. He said RMB exchange rate appreciation cannot offset the rise in bulk commodity prices and cannot be a tool in this aspect, and that the current overshooting is short-term speculative behavior.

Sheng explained that a certain level of RMB appreciation has little impact on global commodity prices. He said the current round of bulk commodity price hikes, a result of the relationship between supply and demand and market speculation, cannot be suppressed through the appreciation of the yuan.

Sheng said the unilateral rapid appreciation will no doubt hurt China's exporters, particularly small and medium-sized companies. It may also hurt the real economy as unilateral rapid appreciation could divert the attention of enterprises from business operations to speculation of the exchange rate.

A recent national meeting on the foreign exchange market self-regulation urged financial institutions and enterprises to adapt themselves to exchange rate fluctuations, warning that gambling on the exchange rate will inevitably lead to losses.

The RMB exchange rate is determined by the market. It has witnessed ups and downs since the beginning of this year, and remained basically stable. In the future, the trend of RMB exchange rate will continue to depend on the market supply and demand, and the changes of the international financial market. Two-way fluctuations of the RMB exchange rate will become the norm.

The central bank has also stressed that the managed floating system of the yuan's rate, based on market supply and demand and adjusted by reference to a basket of currencies, is an arrangement that suits China at present and for some time in the future.