Strong fundamentals lift yuan

The yuan’s middle rate rose to 6.5370 against the US dollar on Tuesday, up 298 basis points over the previous trading day’s rate and the highest since July last year. It also marked the yuan’s rise for seven consecutive business days, and a cumulative increase of 1,209 basis points. A currency generally doesn’t rise or fall unilaterally, particularly not the yuan, which is in the process of marketization and internationalization. As an emerging global currency just included in the International Monetary Fund’s Special Drawing Rights basket, the yuan is in the process of perfecting its middle rate formation mechanism, meaning it has to face market challenges, including those from international short-sellers.

When China’s monetary authorities launched a new round of exchange rate reforms in August 2015, the yuan suffered drastic short-term fluctuations in the following months because of short selling. The market prediction at the time was that the yuan would fall below 6.7, even 6.8, against the dollar. But the authorities took comprehensive measures that stabilized the yuan’s exchange rate by the end of last year. One big advantage of the yuan’s continuous rise in recent months is that it has ruined short-sellers’ plans to make profits from its continuous fall.

China’s stable macroeconomic growth and supply-side structural reform have laid a solid foundation for sustainable economic growth. And thanks to China’s still impressive economic performance, the IMF and other financial institutions expect better growth this year and the next. China’s still high growth and its strong economic fundamentals, as well as the yuan’s internationalization process have driven up the Chinese currency’s value.

China’s intensified efforts to reform its financial market and open up its capital market, its strict regulation to prevent the flight of capital, and the depegging of the yuan from the dollar are the reasons why the market expects the yuan to continue its rise.

The fluctuation of the yuan due to its marketization and internationalization is normal. Still, China has enough foreign exchange reserves to maintain the yuan’s basic stability even in any eventuality.

— BEIJING YOUTH DAILY