China’s forex policy will help to make yuan more stable, flexible
Print Edition
CHINA’S new foreign exchange policy will contribute to a less volatile and more flexible yuan in the future, a central bank economist said.
“The possibility of abrupt adjustments in the exchange rate is down substantially as a more market-based price formation mechanism increases flexibility and helps prevent the yuan going against equilibrium,” Ma Jun, chief economist of the People’s Bank of China, was quoted as saying by Yicai.com yesterday.
The central parity rate of the yuan fell for three consecutive days between Tuesday and Thursday last week by a combined 4.7 percent against the US dollar, triggered by the PBOC’s reform of its forex policy to give market forces a bigger say in deciding the yuan’s value.
Ma claimed the declines were a one-off price adjustment and dismissed widely held concerns of a long-term depreciation of the currency.
China’s economy is holding steady and GDP growth in the rest of the year will outperform the first half, he said.
Active fiscal policies and pro-growth measures will have a positive effect; rising home sales and prices will boost property investment; local governments’ debt-swap programs have solved some finance problems for infrastructure, Ma claimed.
Given the “bright outlook of the currency,” Ma said claims that a falling yuan will plunge bulk commodities prices, trigger depreciation of other currencies and even affect the US’s schedule to lift its interest rate do not hold water.
“Quite a few commentaries are based on expectations of a weak yuan, which appears to be an incorrect precondition, which exaggerate the spillover effect of the price adjustment,” he said.
The PBOC on Tuesday adjusted the exchange rate formation system by taking account of the closing rate on the previous day to better reflect market development. The move, unexpected by the market, prompted a three-day slump.
The market stabilized on Friday as the central parity rate halted the slips and strengthened by 35 basis points to 6.3975 and the spot exchange rate was stable about 6.4.
The Chinese currency has been one of the strongest currencies in the world for years, as its nominal effective exchange rate has appreciated 46 percent since Beijing initiated foreign exchange reforms by depegging the yuan from the US dollar in July 2005.
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