Chinese yuan drops below 7 per dollar, normal two-way market fluctuation shouldn’t be ‘overblown’
Published: Sep 16, 2022 09:51 PM


Chinese yuan traded onshore and offshore slipped to below seven per US dollar on Friday, a two-year low since July 2020, as stronger dollar and expectations on larger Fed interest rate hikes in the next week - in response to US' runaway inflation - weighed on the currency. 

But yuan still remains relatively stable compared with the steep depreciation of other currencies of major economies, and is fluctuating at a reasonable range, backed up by good prospects for China's resilient economy and policy support, analysts said, noting that certain media outlets' hype of 7-mark as a psychological "bottom line" is overblown. 

Despite the recent intensification of volatility in international foreign exchange market, both the State Administration of Foreign Exchange (SAFE) and  Chinese economists asserted that, based on comprehensive data, the yuan's exchange rate has performed steadily among the world's major currencies.

Since mid-August, mainly due to the Fed's strong response to high inflation, the US dollar index has increased by more than 4 percent, hitting over 110, a 20-year high, according to media reports.

During the same period, the British pound and the Japanese yen depreciated by about 5 percent against the dollar, and the euro has fallen below parity with the dollar multiple times.

The depreciation of the yuan against the dollar was relatively mild. Since August 15, the exchange rate of the offshore yuan against the dollar has fallen about 3.88 percent. From the perspective of multilateral exchange rates, the yuan index against a basket of currencies remained basically stable, experts said.

Ding Zhijie, head of the SAFE research center was cited by CCTV news on Friday as saying, "If you look at the past year, the yuan's performance has been far better than the currencies of most developed countries and emerging market countries." 

Ding said that the yuan's exchange rate is basically stable in terms of supply and demand in the foreign exchange market, as well as the level and trend of the exchange rate.

Guo Tianyong, head of the Chinese Banking Industry Research Center at the Central University of Finance and Economics in Beijing, told the Global Times on Friday that the yuan's depreciation is mainly due to the tightening of monetary policy by the Federal Reserve to curb high inflation.

"But the trend also shows once again that we do not blindly protect the 7-mark, an indication of the fact that the behavior mechanism of the yuan's exchange rate is more market-oriented and more flexible," Guo said, adding the yuan's exchange rate is at a reasonable range compared with other major currencies.

China's economic fundamentals support the basic stability of the yuan exchange rate at a reasonable and balanced level, because the domestic market is relatively large and the industrial categories are relatively complete, as has been fully demonstrated through significant exports data during the epidemic, experts said.

In August, foreign investment in domestic bond and stock markets continued to improve, and yuan assets were favored by overseas capital, the CCTV news reported on Friday.

Looking ahead, yuan's depreciation pressure remains due to changing external factors, especially from the US. Expectations of interest rate hikes in the US are getting stronger, especially after its CPI exceeded expectations in August, Tan Xiaofen, an expert at the School of Finance at the Central University of Finance and Economics, told the Global Times on Friday.

Moreover, the sluggish economic situation in Europe, reflected in the decline of Europe's manufacturing trade and PMIs, ignited by inflation and geopolitical conflicts, has continued - all these factors have added fuel to a possible stronger US dollar, Tan said.

"If the dollar index comes up to 115, the yuan's exchange rate against the US may also reach 7.2 to 7.3," Tan said. But he noted that one should also look at the yuan's exchange rate depreciation from a market perspective, pointing out that its fall is a market response.

The US Consumer Price Index (CPI) in August gained 8.3 percent year-on-year, higher than the market expectation of 8.1 percent. 

In comparison, China's CPI rose by 2.5 percent year-on-year in August, a decrease of 0.2 percentage points from July, indicating plenty of room for policy maneuver.