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China鈥檚 move to reference yuan against currencies basket works
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ALTHOUGH the central parity rate of the yuan has weakened against the US dollar in the past days, the onshore and offshore market is calm.
From last Friday to Tuesday, the yuan lost 870 basis points against the greenback, although it regained some territory yesterday. However, the onshore and offshore market was little changed: There was no panic selling.
The People’s Bank of China reassured the market on Tuesday that although the yuan weakened against the US dollar, it remained stable against a basket of currencies.
This illustrates a shift from the past, when the currency’s performance was not so transparent.
When China first moved to make the yuan’s value more market-based by referencing it to a basket of currencies instead of the dollar alone, the market was spooked, setting off a downward adjustment of the yuan.
Since then, the PBOC has increased transparency of the new mechanism and enhanced communication with the market to ease fears over depreciation.
Market analysts attributed the yuan’s recent weakening against the US dollar to the new mechanism.
When the yuan strengthened against the US dollar yesterday, it showed that the mechanism did indeed work — as the value of the basket of currencies moved, so did the yuan.
As communication between the PBOC and the market becomes more effective, sentiment will stabilize.
The PBOC has reaffirmed that the yuan’s devaluation is not in its interests as it could disrupt China’s economic rebalancing efforts.
China’s economy is facing mounting downward pressure. However, with structural reform well under way and rebalancing efforts working out, China’s economic fundamentals remain sound.
That rules out a sharp depreciation of the yuan and supports the long-term stability of the currency.
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