RMB dropped below 7 on Monday as #China gradually moves toward a free floating exhange rate regime that can be an automatic stabilizer for #economy amid ongoing #trade dispute with US, according to a recent report authored by cf40 senior fellow Zhang Bin. cf40.org.cn/uploads/ZB2019…
When an #economy is confronted with a negative impact, he explained, currency
#depreciation may boost the economy through multiple mechanisms: 1) by lowering the price of #exports denominated in foreign currencies and thus boosting #exports;
2) by increasing price of #imports denominated in local currency &
increasing import substitution; 3) by improving price of tradable goods, which in turn can affect the overall price of industrial products and improves the profitability, #investment and production.
Currency #depreciation driven by #market supply and demand canspontaneously balance the market. There’s no need for central bank to sell forex to maintain an established exchange rate, which in return will leave room for monetary policy to adjust other domestic economic issues.
A managed floating with a wide floating band is currently the optimal exchange rate arrangement given there are still significant concerns about a freely floating one in China.
Under such an arrangement, central bank will peg the #exchange rate at a limit that represents a serious deviation from #economic fundamentals and abundant speculative activities.
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