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Long-term depreciation of yuan ruled out
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NO basis exists for continued depreciation of the yuan, and in 2016, China is capable of keeping the currency “basically stable” to a basket of currencies, economists said.
The yuan weakened notably by 1.5 percent against the US dollar this past week, the largest weekly decline since August.
The short-term volatility of the yuan is partly due to rising anxiety over the weakening of the currency, triggering capital flight, said Liu Ligang, chief economist for ANZ China region.
China’s foreign exchange reserves fell to US$3.33 trillion at the end of last month, the lowest level in more than three years and down by US$108 billion from November.
Meanwhile, a weakening yuan is also influenced by the start of a new rate-hike cycle in the United States and a slower Chinese economy, with growth in 2015 expected to register its slowest pace in a quarter of a century, Liu added.
There is, however, no basis for the yuan to see continued depreciation in the long term, said Lian Ping, chief economist of the Bank of Communications.
The fundamentals of China’s economy remained stable, the economy is running within a reasonable range, and structural reform will be expedited in 2016 to keep the economy above water, he said.
Despite the sharpest monthly fall on record, China’s forex reserves are “relatively abundant” and China still holds the world’s largest forex reserves, the country’s foreign exchange regulator reassured.
In addition, the authorities are determined to continue with market-dictated exchange rate reform to keep the currency basically stable at a reasonable level, said Morgan Stanley Huaxin Securities chief economist Zhang Jun.
China Foreign Exchange Trade System launched the CFETS RMB Index on December 11, an yuan exchange rate composite index that measures the currency’s value relative to a basket of 13 foreign currencies, including the US dollar, euro and Japanese yen.
The People’s Bank of China, the central bank, said the index “will help guide market participants to shift their focus from the bilateral yuan/US dollar exchange rate to the effective exchange rate, which is based on a basket of currencies.”
The PBOC noted that valuing against a basket of currencies does not mean a peg to the basket, but it “will contribute to maintaining the yuan exchange rate basically stable at an adaptive and equilibrium level.”
When investors understand the basket-based exchange rate formation mechanism, Zhang said, short selling of the yuan will decline.
Furthermore, the authorities have reiterated that they have no intention to manipulate any drastic depreciation as the contribution of foreign trade to economic growth has declined to a level last seen at the beginning of the century.
“Even though China’s export growth declined in 2015, the share of the country’s export in the global total has increased. There is no need for China to stimulate export and stabilize growth through competitive currency depreciation,” PBOC said on its website.
The key to keeping the yuan basically stable in the medium and long-term lies in reform, with measures to accelerate the internationalization of the yuan, Liu suggests. A stable yuan will benefit China’s capacity upgrade, technology and products development, and cross-border trade and investment, he said.
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