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November 22, 2016

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Yuan extends decline against US dollar but remains stable overall

THE Chinese currency extended its decline against the US dollar yesterday, while analysts expect the central bank to place short-term priority on the yuan’s stability against a basket of currencies rather than the dollar alone.

The central parity of the yuan against the dollar weakened for a 12th day in a row to 6.8985, the lowest in more than eight years.

Triggered by heightening expectations for a US interest rate hike, the yuan’s retreat has accelerated since Donald Trump’s victory in the US presidential election.

The real estate mogul has vowed to roll out a fiscal stimulus package in the US and threatened to brand China as a currency manipulator, both weighing on the yuan’s value against the dollar.

The dollar may keep strengthening at the end of this year and next year, putting depreciation pressure on the yuan, but the Chinese currency is expected to stay stable against a basket of currencies, said Lian Ping, chief economist with the Bank of Communications.

China’s policy-makers have been wise to avoid reckless interventions to shore up the yuan against the dollar, which would have wasted large amounts of foreign exchange reserves and compromised the market mechanism, Lian said.

However, “the yuan’s short-term fluctuation does not mean the authorities have opened the door and given up currency management,” he said, stressing that China still applies a “managed” floating exchange rate mechanism.

The People’s Bank of China’s current strategy is to keep the yuan stable against non-dollar currencies, Lian said.

“The bank may go with the tide for now and intervene only at the proper time,” he noted.

Compared with the yuan, other currencies have weakened even more against the dollar, while the yuan remained stable against them.

The yuan’s market rate against the dollar weakened by 1.49 percent in October, but the eurozone, Japan and Singapore saw their currencies weaken by 2.05 percent, 3.02 percent and 1.87 percent, respectively, against the dollar, according to data released by the China Foreign Exchange Trade System.

In the meantime, the yuan exchange rate composite index strengthened by 0.16 percent against a basket of currencies in October, the CFETS said.

Lian’s view was echoed by Liu Yuhui, professor at the Chinese Academy of Social Sciences, a government think tank.

The central bank’s decision on whether to intervene in the currency market largely depends on the yuan’s status against a basket of currencies instead of the dollar alone, according to Liu.

Meanwhile, he was cautious about the dollar outlook, noting that the market has yet to see how Trump’s future policies materialize.

Lian said the dollar may see some corrections after rapid upward movement due to profit-taking and market digestion of the US interest rate hike.

The dollar will gain at a milder pace next year, and its appreciation may not be sustained as long-term dollar strength will hurt US exports and manufacturing, Lian predicted.

The weakening yuan has aggravated concerns about capital outflow as China’s economy grew at the slowest pace since the global financial crisis.

Chinese officials have repeatedly ruled out the possibility of sharp, sustained yuan depreciation against the dollar, citing China’s economic fundamentals, current account surplus and huge forex reserves.


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