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Recent depreciation of Chinese currency a result of market forces

2018-07-04

Source: Global Times    Published: 2018-7-3


China`s central bank governor on Tuesday offered reassurance about yuan stability while vowing a continuation of market-oriented foreign exchange reforms.


There have been market fears about the yuan`s rapid slide since mid-June, but the pledge could ward off rumors that the authorities are deliberately allowing the currency to depreciate in order to benefit the economy amid China-US trade tension, analysts said.


The recent fluctuations in the domestic forex market have been "pro-cyclical" moves that have mainly been triggered by a strong dollar and external uncertainties, Yi Gang, governor of the People`s Bank of China (PBC), the country`s central bank, said in a statement posted on the PBC`s website.


The yuan`s daily fixing rate against the US dollar weakened by 340 basis points on Tuesday from the previous day, PBC data showed.


The daily fixing rate had been on an upward trend for eight trading days in a row by Friday before inching down 9 basis points on Monday.


The yuan`s slide at a time when trade rows between the world`s two largest economies continue to draw attention has stoked speculation about what could be behind the yuan`s weakening.


Voicing his concerns about a sustained yuan slide, Zhang Bin, director of the Global Macroeconomy Research Division of the Chinese Academy of Social Sciences, said that China would not use the yuan`s depreciation as a "weapon" in the trade tension with the US.


"If China were to make such a move, it would bring multiple negative effects," he told the Global Times.


First, it would be a sign to other economies that China would easily interfere in the exchange rate as a weapon in trade disputes, Zhang said. Second, other market economies` currencies might also depreciate along with the yuan, which would result in anger and complaints toward China. Third, it could trigger further depreciation expectations and might cause capital outflows.


"The yuan`s depreciation is a result of market forces; it is not a result of the trade war with the US," he stressed.


"The yuan`s depreciation is because of the US dollar, not because there are any internal flaws in China`s economy," said Zhao Xijun, co-director of the Finance and Securities Research Institute at the Renmin University of China.


Confidence


Citing the strong fundamentals of the economy, Yi said that China currently implements a managed, volatile exchange rate system that is based on market demand and supply. It is also moderated with reference to a basket of currencies, he added.


Yi said China will continue to execute a stable and neutral monetary policy while deepening market-oriented reforms for the exchange rate to keep the yuan at a reasonable and balanced level.


Also on Tuesday, Deputy PBC Governor Pan Gongsheng said at a forum in Hong Kong that the country has the foundations, ability and confidence to maintain the yuan`s basic stability.


In another sign of China`s confidence about reining in financial risks, the nation`s new financial stability oversight committee, led by Vice Premier Liu He, held its first meeting on Monday. A briefing on key points from the meeting that was posted on the central government`s website Tuesday said there are various favorable conditions for the country to successfully cope with major risks and respond to external risks.


Zhao Xijun is a senior fellow of Chongyang Institute for Financial Studies at Renmin University of China.

Key Words: currency   market   China   Zhao Xijun  

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