Sound fundamentals, regulatory transparency can help avoid further yuan decline

By Li Qiaoyi Source:Global Times Published: 2016-1-29 0:03:31

China's foreign exchange regulator offered more clarity on the country's financial system with its denial on Thursday of a Wall Street Journal report that claimed the world's second-largest economy was moving to restrict repatriation of earnings by foreign companies operating here, among other steps to rein in capital outflows.

Such adequate and timely responses from the authorities can help in removing uncertainty caused by market rumors and quell unnecessary worries about the Chinese economy.

Also, those who are overly concerned about China's financial system being destabilized by a weakening yuan should hit the pause button to gain more clarity on China's currency situation.

Admittedly, the situation for the Chinese currency has apparently become uncertain since the People's Bank of China, the country's central bank, surprised the markets by changing the way it sets the yuan's daily fixing rate in August 2015. Since then, the weakening of the yuan has turned out to be a byproduct of the move, which was originally intended to attune the currency's daily fixing rate more closely to actual market needs.

The continued fall in the country's yuan funds outstanding for foreign exchange in recent months hints at a possible vicious cycle of monetary easing, a weakening yuan and worsening capital outflows. That is because capital outflows would entail credit easing so as to maintain domestic liquidity, which inevitably would put pressure on the currency to depreciate further.

However, it must be borne in mind that the fundamentals of the Chinese economy are the most pivotal factor in deciding the stability of the yuan. And as long as the economy is not heading for a hard landing, there is a good reason to believe that uncertainty over the yuan's future moves will come to an end.

In the latest official reassurance, Chinese Premier Li Keqiang told IMF Managing Director Christine Lagarde that against the backdrop of slowing global economic and trade growth and acute volatility in the international financial markets, China's economy retained medium to high-speed growth of 6.9 percent last year, Xinwen Lianbo, an influential daily news program by China's State broadcaster, reported on Thursday.

The yuan has kept stable against a basket of currencies and there is no basis for a sustained devaluation of the yuan, the premier stated, adding that China will steadily push for reforms of the formation mechanism for the yuan's exchange rate and enhance communication with the markets while keeping the yuan basically stable within a reasonable range.

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



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