In an effort to reassure important global markets as investors for a possible resumption of last week’s market turmoil, China‘s foreign exchange regulator revealed that the Chinese financial system is currently having a “largely stable and healthy” status, says Financial Times.
The same source mentions that China‘s central bank and its management of the renminbi is currently under the spotlight, since the markets regulator stabilized last week’s stock sell-off, scrapping a “circuit breaker” mechanism, extending a ban on share sales by large shareholders.
Last week, the renminbi fell 1.5 percent, compared to the U.S. dollar, in onshore trading. In the same time, traders have ignored the guidance offered by the central bank, not focusing on the renminbi’s stability against 13 currencies.
Recently, the People’s Bank of China has been letting the onshore rate weaken, being implied in the offshore market to limit the game. Also, the State Administration of Foreign Exchange has been scrutinising banks that help clients choose between the two.
This move is considered as inconsistent, as the International Monetary Fund has recently designated the renminbi as an official reserve currency, under its special drawing rights regime,
“We seem to be drifting back into a two-tiered system and that is worrying,” said one investment strategist, who preferred to remain anonymous.
“How can you be in the SDR and yet you penalise banks for arbitraging between the two rates?” he added. “It’s outrageous and wrong. They shouldn’t be in the SDR and doing that. They should be making sure they continue liberalising to unify the two rates.”
In a statement release this weekend, the State Administration of Foreign Exchange wanted to reassure investors the China‘s economic fundamentals are strong. “Foreign exchange reserves are relatively abundant and the financial system is largely stable and healthy”, the organization’s representatives said.