19 October 2018
The renminbi's decline against the US dollar is more likely the result of the Chinese central bank's intervention. Photo: Bloomberg
The renminbi's decline against the US dollar is more likely the result of the Chinese central bank's intervention. Photo: Bloomberg

Yuan’s recent depreciation to be short-lived

Renminbi’s recent weakening does not mark the end of the currency’s decade-long appreciation trend, as China will continue to see its money inflows outweighing outflows this year. However, it is also unrealistic to expect the yuan to rise at a robust pace because policymakers apparently believe that two-way fluctuations will help find a point of equilibrium for the currency.

The Chinese currency has weakened for seven trading days, marking a 1 percent decline against the US dollar since Feb. 17 on Wednesday.

As there is little sign that China is experiencing massive capital outflows, the decline of the yuan was more likely a result of the intervention of the People’s Bank of China, coming as a correction to the fast appreciation the yuan witnessed in January.

The Chinese central bank wanted to convey a message that the currency’s movement should be two-way so that speculators betting on the currency to continue heading north would learn a lesson. It is also likely that the central bank wanted to weaken the value of the yuan a bit before it announces a widening of the currency’s trading band.

The PBoC had employed the same tactic in the past. So it is too early to say this round of depreciation will become a long-term trend.

It is likely that the yuan will continue to rise this year, although the pace would be smaller, because the fundamentals have not changed.

China will witness a net capital inflow this year, providing a base for the yuan to rise against the US dollar, if January figures provide a clue.

Last month, banks’ foreign exchange surplus amounted to US$73.3 billion, indicating a strong money inflow.

In January, China ran a trade surplus of US$31.86 billion, up from US$25.64 billion in December. As an important source of capital surplus, trade will continue to generate net money inflows this year.

As the economic recovery in the European Union and the United States becomes more solid, China’s exports will grow, possibly helping it register a wider trade surplus.

Although the US tapering of its quantitative easing policy may result in some money migrating from China to the United States, China will still retain most of the capital so long as its interest rate is higher than developed economies and its economic growth outperforms other major economies.

On the policy front, the new leadership appears keen on maintaining the value of the yuan, which it may see as a tool to help push economic restructuring.

In March 2012, then Premier Wen Jiabao indicated that the value of the yuan has reached “an equilibrium”. He kept his word. That year, the yuan only went up 1.03 percent against the US dollar, the slowest growth since the end of the 2008-09 financial crisis.

But the yuan picked up speed last year, after President Xin Jinping and Premier Li Keqiang took office. The currency rose 3 percent, a remarkable increase considering that the Chinese economy slowed down to a multiyear low. This was a strong display of policymakers’ willingness to leverage the appreciation of the currency to restructure the economy and propel reforms.

Policymakers also want the yuan’s value to stay high because they want to promote Chinese investment overseas. Chinese officials have placed more emphasis on outbound investment than inbound investment in recent years, encouraging both state-owned and private companies to penetrate global markets.

A stronger yuan means higher purchase power in foreign currencies. This helps Chinese enterprises undertake mergers and acquisitions, source foreign products and slash production costs in overseas markets.

In addition, policymakers want the yuan to remain strong to help bolster its allure among foreign users. To internationalize the yuan has become a government priority, but the reality is that the currency’s strong value, instead of its convenience or influence, makes it stay competitive globally.

Overseas investors will significantly cut their yuan portfolio if it starts following a depreciation trend, a situation central bank governor Zhou Xiaochuan, dubbed Mr. Renminbi, would not be happy to see.

To sum up, a strong yuan will continue to be the theme of the year, and it is likely to remain on an upward curve, although fluctuations are expected to be wide amid the government’s push for a larger trading band, volatile moments in cross-border capital flows and authorities’ attempt to test an equilibrium point for the currency.

– Contact the writer at [email protected]



The writer is an economic commentator. He writes mostly on business issues in Greater China.

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