The RMB Yuan is facing renewed devaluation pressure over expectations of a US Fed rate hike, but a large RMB Yuan devaluation is unlikely as China continues its market-oriented Fx (foreign exchange) reform.
The central parity rate, or the fixing rate of the Chinese currency, had been weakening since May and recorded the lowest level last Monday in 5 years as US Fed Chairwoman Janet Yellen hinted at a possible interest rate raise in the next few months.
The depreciation in May was the largest monthly fall since last August’s Fx mechanism reform, raising market concerns that the Chinese government may backtrack on Fx reform with greater intervention.
Currency pessimists should be reassured that fluctuation means flexibility and is part and proof of the market-determined Fx reform, which Chinese authorities have promised to continue implementing steadily to avoid wild fluctuations that would impact on global interests.
The RMB Yuan has experienced several rounds of volatile adjustments since August, but exchange rate volatility is limited compared with late Y 2015 or early Y 2016. The market has tolerated and adapted to greater exchange rate flexibility without much panic as the formation mechanism of the fixing rate has become very transparent.
The market’s increased capability in digesting greater USD/CNY fixing volatility is likely to encourage China’s central bank to push through with more capital account liberalization and Fx reform measures.
The adjustment of the system from a highly managed Forex regime to a floating one will be a gradual process. The current fixing framework of tracking USD movements Vs China’s trading partners serves the interests of China and the world at large.
China has allowed greater flexibility in the RMB Yuan (renminbi) exchange rate while maintaining its stability as keeping the transition stable is beneficial to both China and its trading partners.
There is limited room for China to purposely depreciate its currency to boost exports, as China is already the world’s largest trading nation and RMB Yuan uncertainty will have serrious impacts on the global financial and commodity markets, which will affect China itself.
Meanwhile, the RMB Yuan should be allowed to move moderately within a proper range. The market will gradually adapt to exchange rate volatility and strengthen Forex risk management, providing a stable financial environment for Chinese global growth and reform.
The RMB Yuan exchange rate is becoming more flexible and reflective of market forces. China is committed to making it more market-determined and increasing its 2-way flexibility within a prescribedmarket, flexible range.
The RMB Yuan may show more fluctuations as the USD moves, but the large depreciation seen earlier this year is unlikely to recur and the RMB Yuan will maintain stable in the long run.
By Zhang Zhongkai
Paul Ebeling, Editor