China not seeking weaker yuan
Currency unlikely to tumble as market-oriented reform continues
China hasn’t depreciated the yuan to cope with external disturbances such as the ongoing China-US trade dispute, since the currency’s long-term depreciation would harm the nation’s economy and financial markets.
Since the yuan moved lower in April, its value has declined about 6 percent so far. The recent weakness in the yuan has stirred speculation in Western media that China is depreciating the currency to offset the escalating trade war’s impact on its economy.
Liu Dongliang, a senior analyst at the China Merchants Bank, told the Global Times on Sunday that the yuan’s sharp depreciation was mainly caused by a strong US dollar as well as short-term pressure on the Chinese economy, not government manipulation.
China’s foreign exchange reserves rose 0.19 percent month-on-month to $3.1179 trillion as of the end of July, data from the People Bank of China (PBC), the country’s central bank, showed on August 7.
The rise in foreign exchange reserves could suggest that authorities are not actively intervening in the foreign exchange markets to prevent further yuan weakness. This complements the view that the decline in the yuan is being driven by market forces, said Lukman Otunuga, a research analyst at FXTM, a forex broker in Cyprus, in a note sent to the Global Times.
“China always sticks to market-oriented reform of the yuan’s exchange rate and lets the market play a decisive role. China neither resorts to competitive devaluation of the yuan nor depreciates its currency to cope with trade disputes,” the PBC said on August 10 in the second-quarter China Monetary Policy Report.
The yuan’s depreciation has an adverse impact on China’s economy and financial markets in the long term according to Cong Yi, an economic professor at the Tianjin University of Finance and Economics.
“Weakness in the yuan will likely drive price rises in bulk imports and thus affect domestic commodity prices. Also, depreciation expectations may boost capital flight from China which will harm China’s foreign exchange reserves and its attraction for foreign investment,” he told the Global Times on Sunday.
“Investors should not worry about the yuan’s depreciation too much. There is not much room for the yuan to drop, as the authorities continue to carry out market-oriented reform," Cong said, adding that unlike Turkey’s absolute financial opening up China has retained more autonomy and intervention tools.
He added that some intervention is essential, especially capital controls and prevention of capital flight, under the current circumstances.
The PBC announced on August 6 it would impose a reserve requirement of 20 percent on trading of foreign exchange forward contracts. This was intended to stabilize the yuan by making it more expensive to short the currency.
In the meantime, the Shanghai branch of the PBC issued a notice on Thursday in which it barred commercial banks from using interbank accounts to deposit or lend yuan offshore through Free Trade Accounting Units, the Shanghai Securities News reported on Saturday, citing industry insiders.
That move will make shorting the yuan more expensive.
The yuan has shown signs of appreciation, with its central parity rate against the US dollar up 52 basis points to 6.8894 on Friday.
Despite the sharp fall in the yuan’s offshore exchange rate, its use globally has remained stable.
In June, the yuan remained in the No.5 place in the currency rankings for global payments with a share of 1.81 percent, data from global financial institution network SWIFT showed in July.
“Investors should not worry about the yuan’s depreciation too much. There is not much room for the yuan to drop, as the authorities continue to carry out market-oriented reform.” Cong Yi, professor at the Tianjin University of Finance and Economics