China should show tolerance for yuan depreciation and promote market reforms

By Hu Weijia Source:Global Times Published: 2016/10/19 23:38:40

The Chinese yuan should be allowed to further depreciate against the US dollar if the depreciation is a result of automatic corrections under the impact of market supply and demand.

Earlier this week China's central bank weakened the yuan's daily reference rate against the dollar to a six-year low, sparking concerns over the Chinese economy. Some analysts expect the yuan may still face further depreciation pressure as new monetary easing measures are announced to stimulate growth and create jobs, while expectations of another US interest rate hike is likely to further bolster the dollar.

It is easy to imagine that the continuous depreciation of the yuan against the dollar may put the Chinese government under great pressure, but it would not be a good idea to encourage the authorities to intervene too much in the foreign exchange markets to prevent the depreciation of the yuan. China should show greater tolerance for exchange rate fluctuations, and continue to promote reforms to make the yuan's exchange rate more market-driven despite depreciation pressures in the short term.

A market-driven exchange rate is normally seen as an automatic stabilizer, which would prompt a fall in the exchange rate amid the economic downturn, leading to a decline in export prices and boosting exports. Although China still has ample foreign exchange reserves, the central bank should not pour a large amount of dollars into the market to support the yuan, because such moves can distort the economy and impede automatic corrections of the exchange rate. What the central bank needs to do is reduce its intervention in the foreign exchange market and allow the exchange rate to move naturally.

But this is not an easy job as Beijing may face some political pressure from its trade partners if it lets the yuan freely depreciate, even if such fluctuation is a process of automatic correction.

The yuan has already been a frequent theme for Donald Trump since he began his presidential campaign, saying China's devaluation of the yuan would be "devastating" for the US. Frankly, there is no need for China to be bothered by such political rhetoric and irrational nationalism.

Instead, China needs to pay greater attention to two things. The international market is now even more closely tied to China's economic performance and the global interest in the fluctuation of the yuan is unprecedented. China needs to be aware of the impact its policies may have on other countries and increase the transparency of its decision-making regarding the yuan exchange rate.

Additionally, the Chinese government has the responsibility and obligation to prevent the yuan from falling too quickly and sharply to maintain the stability of the currency.

The author is a reporter with the Global Times.


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