Expanded RMB floating band to stimulate exports, growth - with eye to SDR inclusion?

HONG KONG – The most important of new policies announced by the State Council of China to stimulate exports and support growth is the decision to expand the RMB floating band. After three expansions since exchange rate reform in 2005, this will further promote financial liberalisation and RMB internationalisation, BBVA Bank says in a research note.

The other policies include further facilitating cross-border RMB settlements, promoting more financial products to help enterprises avoid exchange rate risks, and expansion of export credit insurance.

“We expect that these new export stimulation policies will help to stabilise China’s exports in the face of weak domestic and external demand. Looking ahead, we envisage that more easing measures will be ahead to avoid an economic hard-landing in the rest of 2015,” BBVA says.

Sluggish domestic and external demand, together with the recent stock market crash, prompted the State Council to issue its new export policies, BBVA says, while expansion of the RMB floating band indicates another significant move of financial liberalization.

“Since China’s exchange rate reform in 2005, the authorities have on three occasions expanded the exchange rate band to 2% of the current floating range. Although the exact time and the extent of expansion have not been announced yet, the market expects (the new expansion) to be in the second half of 2015 and to expand to 3%.

“Irrefutably, the fourth expansion of the RMB floating band will further promote financial liberalisation and RMB internationalisation. Thus, it will increase the chance that the RMB will be included in the IMF’s Special Drawing Rights (in November), as financial liberalisation is one of the most important concerns of the IMF.”

Looking forward, BBVA says more easing policies are expected to stimulate growth over the balance of 2015. “On the front of monetary policy, we envisage that the PBoC will implement an additional interest rate cut of 25 bps in Q3, which is likely to be accompanied by a 50-bps universal reduction in the RRR.

“The PBoC will also increase the usage of unconventional targeted tools to ensure liquidity adequacy in the banking system in a bid to lower financing costs for firms, as with QE-like measures.

“On the fiscal front, as we anticipated, the authorities have started to relax some tightening measures on local governments and to expand fiscal deficit, in order to avoid fiscal consolidation at the local government level.” www.bbvaresearch.com (ATI).