BEIJING — The seemingly abrupt fall in the value of the Chinese currency against the US dollar in recent weeks is mostly due to a strengthening dollar and such pressure will remain in the short term.
However, there is no ground for concern that the Chinese yuan would embark on a one-way street of devaluation, given that the fundamentals of the Chinese economy are sound and the internationalization of the yuan has steadily moved forward.
In anticipation of the rate hike by the Federal Reserve in December, the US dollar index recently surged to its highest level since March.
Against such a backdrop, all the other major currencies have headed lower, including the Chinese yuan.
But it is noteworthy that while the yuan exchange rate against the dollar has reached the lowest in six years, it is gaining value against other currencies.
According to a Bloomberg report dated Oct 17, the yuan slumped 0.8 percent against the greenback last week but rose 0.6 percent against a trade-weighted currency basket during the same period, registering its biggest advance in three months.
The Chinese currency has in the past experienced a long period of stable exchange rates and China’s reform to make its exchange rate mechanism more market-oriented will probably see higher volatility for the yuan.
That said, the recent depreciation of the yuan against the dollar has only minimal impact on the domestic market and due to the strong macro-regulating capacity of the Chinese central bank, it is unlikely that the yuan will be mired in a messy devaluation.
Analysts believe that although the yuan will still be in a weaker position against the dollar in coming weeks, the room for continuing yuan depreciation is quite limited.
China has maintained a substantial surplus in its current account and it also has a huge foreign reserve. Meanwhile, its financial system is well-anchored compared to many other leading economies. Such factors decide that a long-term devaluation of the yuan is an unlikely scenario.
Moreover, the yuan’s internationalization and China’s ongoing endeavor to further open its financial markets will only bolster the currency.
