US tax cut pressures yuan

By Xie Jun and Dong Feng Source:Global Times Published: 2017/12/6 21:38:39

Currency will remain stable in long term: experts


Photo: VCG

The yuan's reference rate has been edging down for eight consecutive trading days as of Wednesday, the longest continued slide for the yuan since November 2016.

The yuan's central parity rate against the US dollar stood at 6.6163 on Wednesday, down 50 basis points from Tuesday, according to data from the People's Bank of China, the country's central bank.

Experts said the yuan's slump has been triggered by the recent US announcement of a tax cut, but they also said that this effect will not last long. 

So far this year, the yuan's reference rate against the dollar has risen by about 5 percent.

Influence from tax cut

Zhou Yu, director of the Research Center of International Finance at the Shanghai Academy of Social Sciences, told the Global Times on Wednesday that the yuan's slump has been a result of the US government's recent tax cut policy.

"The tax cut will cause a certain level of capital outflow to the US, which will push up the US dollar and add depreciating pressure to the yuan. But I don't think the pressure will be large, as China's capital flows are still under strict government control," Zhou noted.

The US Senate on Saturday approved a massive tax overhaul, which is set to be the largest change to US tax laws since the 1980s, Reuters reported.

According to the report, when the tax cut bill takes effect, the US corporate tax rate will be cut to about 20 percent from the current 35 percent.

The US Dollar Index stood at 93.4 as of press time on Wednesday, almost the same level as on the previous trading day.

The index had risen by 0.23 percent on both Monday and Tuesday.

Pressure limited

Liu Jian, a senior research fellow at Bank of Communications, told the Global Times on Wednesday that the US dollar is also connected to the euro, and with the sound development of the European economy, the pressure for the dollar to appreciate and for the yuan to depreciate is limited.

"The pressure will not trigger the next wave of yuan depreciation, as the current changes are normal reactions to the market. Within the next two months, there will not be any unexpected fluctuations for the yuan," Liu said.

Zhou also noted that in the longer term, the tax cut policy will add to the US government's financial deficit, which will prompt the US dollar to edge down and the yuan to edge up, but this influence could also be offset if the US economy continues to improve.

"Overall, the long-term influence of the tax cut on the yuan is hard to predict," Zhou said.

Stable trend likely

Experts predicted that the yuan's exchange rate would be relatively stable in the long term.

Lu Qianjin, a professor of international finance at Shanghai-based Fudan University, told the Global Times on Wednesday that in the long run, the value of the yuan will be determined by the development of China's economy, the balance of international payments and capital flows.

"All the factors affect each other, and China has enough resources to face the related challenges," Lu noted.

Jing Ulrich, managing director and vice chairman of Asia Pacific at JPMorgan Chase, said that in the long term, China's economic growth speed will outpace that of the US.

With economic growth as well as firm government management of the yuan, the currency is likely to maintain its stable trend against the US dollar, she noted.

Zhou said that most of the depreciation pressure for the yuan was released in 2015, and in the future stability will be the main trend.

"I predict the yuan will fluctuate around 6.5 against the US dollar for quite a long time," he said.

Zhou also noted that the government wants the yuan to remain stable. "Large-scale appreciation would hurt exports, while depreciation might stir protests from the US," he said.



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