Yuan stability remains policy priority as dollar strengthens: experts

Source:Agencies Published: 2016/11/23 18:53:39

Going with the currency currents


The yuan weakened in a volatile morning session on Wednesday, with the offshore yuan falling to a record low, signaling policymakers' acceptance to allow the yuan to continue to depreciate against the greenback. The Chinese currency declined by 1.49 percent against the dollar in October, but experts said policymakers remain unconcerned because the yuan has remained stable against a basket of other currencies, which has also weakened with the dollar's precipitous rise over the last few weeks. Experts noted that policymakers will likely tolerate a weaker yuan so long as the depreciation doesn't spin out of control. China's officials have repeatedly ruled out the possibility of rapid, sustained yuan depreciation against the dollar, citing the country's solid economic fundamentals, current account surplus and abundant foreign exchange reserves.

The headquarters of the People's Bank of China in Beijing Photo: CFP

The headquarters of the People's Bank of China in Beijing Photo: CFP



The yuan weakened in a volatile morning session on Wednesday, with the offshore yuan falling to a record low, 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 rate of the currency weakened 125 basis points to 6.8904 against the US dollar on Wednesday, according to the China Foreign Exchange Trading System (CFETS).

In China's spot foreign exchange market, the yuan is allowed to rise or fall by 2 percent from the central parity rate each trading day.

The central parity rate of the yuan against the US dollar is based on a weighted average of prices offered by market makers before the opening of the interbank market each business day.

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 central bank is following the trend as the dollar is rising. It's not necessary for it to resist market forces," Reuters reported on November 18, citing a policy adviser who declined to be identified when recalling policy discussions. "Appropriate yuan depreciation will be good for stabilizing market expectations and the economy, as long as there is no sharp, runaway depreciation."

The People's Bank of China (PBC), the country's central bank, declined to comment to Reuters.

"I don't think the breaking of 7 is imminent. We may have to wait until next year," Reuters reported, citing a second adviser, who also declined to be identified. "If the pace of depreciation is too fast, if it hits 7 before the end of 2016, the central bank will control it."

But the yuan's outlook is still clouded by the election of Trump as US president because 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 2016, 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.

'With the tide'

China's policymakers 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 central bank'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 Chinese 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 CFETS.

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

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

Many vs one

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 just the dollar, Liu said.

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 in 2017, and its appreciation may not be sustained as long-term dollar strength will hurt US exports and manufacturing, Lian predicted.

The weakening yuan has exacerbated 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 the country's solid economic fundamentals, current account surplus and abundant foreign exchange reserves.

More needs to be done to help the Chinese economy counter the downturn and balance capital flows, or the yuan will face more pressure from the strengthening dollar in the short term, Lian said.

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