No need for concern over yuan fluctuations, but govt should improve transparency

By Hu Weijia Source:Global Times Published: 2016-1-10 23:23:01

Discussions about whether the Chinese authorities have enough tools to keep the yuan from suffering significant depreciation have attracted a lot of attention over the weekend, after a hefty decline in the currency rocked mainland stocks and global financial markets last week.

China's central bank had showed unprecedented tolerance toward the continuous depreciation until it guided the yuan slightly higher on Friday, triggering market speculation that China may be shifting its strategy for how it manages the yuan exchange rate.

China has indeed been relaxing its foreign exchange controls and the currency fluctuations may continue.

This is not necessarily a bad thing, as it is part of the country's efforts to adjust its currency toward a more market-based regime.

However, it is unlikely China will adopt a completely laissez-faire attitude toward currency fluctuations.

After the IMF announced late last year that the yuan would be included in its Special Drawing Rights (SDR) currency basket, it was inevitable that China would speed up the process of unhooking its currency peg to the US dollar.

The Chinese authorities have urged investors to gauge the yuan's value by tracking a basket of currencies, rather than just the dollar.

The China Foreign Exchange Trade System (CFETS), the country's interbank foreign exchange market, also announced in December that it had launched a new trade-weighted yuan exchange rate index to better reflect fluctuations in the value of the Chinese currency.

It is no surprise that the authorities want to extend their tolerance toward fluctuations in the yuan's exchange rate against the dollar, but it does not mean the country has less ability to maintain exchange rate stability.

Li Daokui, a professor at Tsinghua University and a former academic adviser to the People's Bank of China, the country's central bank, told a forum held in Beijing over the weekend that it would be difficult to maintain the country's foreign currency reserves at the psychologically significant level of $3 trillion through to the end of 2016 if reserves fall at the same speed we saw throughout last year.

Li also noted that it would intensify depreciation pressure on the yuan if the reserves fall below that level.

The decline in foreign currency reserves highlights the challenges China is facing in preventing the yuan from depreciating against the dollar, especially after the US Federal Reserve's recent decision to raise interest rates.

But the country's reserves are still sufficient to maintain the stability of the yuan exchange rate.

China's international reserves account for 34 percent of GDP, much higher than the average of 16.7 percent in emerging countries, according to the research institute of Minsheng Securities.

There is no basis for persistent depreciation of the yuan, and what China needs to do now is to eliminate unnecessary concerns over the country's move to unhook its currency from the dollar.

As the international market is now closely tied to China's economic performance, Chinese policymakers need to continue their efforts to increase policy transparency to avoid misinterpretations of the Chinese markets. 

The author is a reporter with the Global Times. bizopinion@globaltimes.com.cn



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