Moves on yuan point to re­form

China Daily (USA) - - BUSINESS - By WANG YANFEI wangyan­fei@chi­

The re­cent dep­re­ca­tion of the yuan re­flects Bei­jing’s move to­ward a free float­ing ex­change rate sys­tem, af­ter the cen­tral bank set the yuan ref­er­ence rate on Thurs­day at record low level against the US dol­lar.

The Peo­ple’s Bank of China set the cen­tral par­ity rate of the yuan against the green­back at 6.9085, fol­low­ing 6.8904 the pre­vi­ous day, the low­est level since June 2008.

The yuan is al­lowed to rise or fall by 2 per­cent from the cen­tral par­ity rate in China’s spot for­eign ex­change mar­ket.

The de­pre­ci­a­tion of the yuan is a result of a strong dol­lar sup­ported by an in­ter­est rate hike next month that can be re­garded as a “cer­tain” move that is in line with mar­ket ex­pec­ta­tions, said Chen Fengy­ing, a se­nior re­searcher with China In­sti­tutes of Con­tem­po­rary In­ter­na­tional Re­la­tions.

Se­nior US Fed­eral Re­serve of­fi­cials sug­gested an in­ter­est rate rise would come “rel­a­tively soon”, ac­cord­ing to min­utes re­leased on Wed­nes­day from the Fed’s meet­ing ear­lier this month.

With a strong dol­lar, the Peo­ple’s Bank of China has lit­tle in­cen­tive to in­ter­vene at a time when the cen­tral bank’s re­form to­ward a more mar­ke­tized float­ing sys­tem would only con­tinue af­ter the yuan joined the re­serve bas­ket of the In­ter­na­tional Mone­tary Fund in Oc­to­ber.

David Lip­ton, first deputy man­ag­ing di­rec­tor of IMF, on Tues­day ap­plauded China’s ef­forts on up re­form of the yuan’s ex­change rate.

Gold­man Sachs fore­cast the yuan-dol­lar ex­change rate would hit 7.30 by the end of 2017, as China is on its bumpy road of economic re­cov­ery.

Looking ahead, nei­ther the US in­ter­est rate would go up a large ex­tent nor would the yuan see sus­tained de­pre­ci­a­tion, ac­cord­ing to Zhao Xue­qing, an econ­o­mist with the In­sti­tute of In­ter­na­tional Finance un­der the Bank of China.

“The Fed is ex­pected to raise the in­ter­est rate slowly, as pres­i­dent-elect Don­ald Trump’s mas­sive in­fras­truc­tural con­struc­tion plan will boost gov­ern­ment in­vest­ment,” said Zhao.

In the mean­time, the appetite to pass siz­able tax cuts along with an equally strong appetite to keep on spend­ing could add to up­ward pres­sure on US long-term in­ter­est rates, a re­port led by Lewis Alexan­der with No­mura Group said on Wed­nes­day.

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