What's behind the RMB devaluation fears again?
It's not the policy shift, but lack of policy communication by the PBOC that is causing volatility.
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ON Jan 7, the PBOC set the USD-CNY fixing 0.5 per cent weaker than the previous day, the biggest decline since the Aug 11, 2015 move when the PBOC changed the calculation mechanism for the fixing. This set off another round of renminbi (RMB) devaluation fears, triggering a second sell-off of A-shares which caused the circuit breakers to kick in and halt the day's trading for the second time in just four days.
In fact, the RMB onshore exchange rate has dropped against the USD by 1.5 per cent between Jan 1 and Jan 6, a huge move by its standard. So, when the PBOC lowered the fixing on Jan 7 by a larger than usual extent (0.5 per cent), it revived fears of an imminent RMB devaluation. Some even feared that the PBOC might be losing control of the financial system.
I, still, stubbornly think that these fears are exaggerated. But it is true that the PBOC might have shifted its FX policy to tolerate more decline of the RMB against the USD for a good reason that we have argued earlier. The problem does not lie in the policy shift, but in the lack of clear policy communication by the PBOC.
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