Yuan's fluctuations not undermine long-term stability

BEIJING - The Chinese yuan has steadily weakened against the US dollar since the start of the year, sending shockwaves through currency markets. Financial experts have weighed in to point out that the depreciation is, in essence, a self-correction, and the yuan will continue to remain stable.

Self-correction

Pressure on the yuan and other major currencies has intensified this year as the dollar surged.

Black swan events, including Brexit and the US presidential election, drove demand for the greenback as a safe-haven currency, propping up its value.

Accelerated economic growth in the United States, an imminent interest rate hike, and expectations of Donald Trump's expansionary fiscal policies have already caused the Dollar Index to advance 6 percent in the recent two months.

Although the greenback has appreciated against most other major currencies, its value has risen only modestly against the renminbi.

In developed economies, the Japanese yen, the euro and the Swiss franc have weakened 10.5 percent, 5.8 percent and 4.2 percent, respectively, against the dollar since October.

In emerging economies, the Malaysian ringgit, the Korean Won and the Mexican peso have depreciated 7.2 percent, 6.5 percent and 6.1 percent, respectively.

By contrast, the yuan has weakened around 3 percent against the dollar during the period, much milder than other currencies.

"The yuan has been self-correcting recently after its lopsided appreciation of the previous decade," said Ren Zeping, chief economist at Founder Securities, while dismissing concerns that China is engaged in competitive devaluation.

A stable, strong currency

It is noteworthy that while the yuan's exchange rate against the dollar has reached its lowest in eight years, it is gaining value against other currencies.

The yuan has strengthened 7.5 percent, 2.5 percent and 0.5 percent against the yen, the euro and the British pound, respectively, in the recent two months.

It has also appreciated 4.1 percent, 3.3 percent and 1.2 percent against the ringgit, the won and the Singapore dollar.

"The yuan still presents the characteristics of a stable and strong currency in the global currency system," said Yi Gang, deputy governor of the People's Bank of China (PBOC), the central bank.

As China's economy recovers and institutional reform improves the business environment, Yi believes capital outflow will return.

The dollar "looks tempting" in the near term due to the imminent interest rate hike, causing more companies and individuals to opt for the greenback, said Bai Ming, researcher with an institution affiliated with the Ministry of Commerce.

However, with the yuan's internationalization, the demand for the currency will continue to expand on a medium to long term, Bai said.

Limited room

Exchange rates are decided by a slew of factors, including a country's economic fundamentals, foreign exchange reserves and market sentiment.

The room for the Dollar Index to further climb this year is limited, as news of a potential US interest rate hike has been almost fully digested by the market.

Looking ahead, the yuan may come under short-term pressure but have limited room for further weakening, analysts agreed.

They also ruled out the possibility of substantial depreciation in the longer term as China continues to witness steady economic growth, progress in economic restructuring and a stable financial market.

"There is no basis for a sustained depreciation trend for the yuan, and we maintain the forecast of 6.98 for the end of 2017," said Huili Chang, analyst at China International Capital Corp.

Yu Yongding, economist and former central bank advisor, echoed Chang's view, saying that a country's currency never weakens substantially when the country keeps robust economic growth and boasts massive current account surplus and foreign exchange reserves, at least not on the record.

China's manufacturing Purchasing Managers' Index (PMI) rose to 51.7 in November from the previous month's 51.2, marking its strongest pace in more than two years.

The stronger-than-expected PMI data added to evidence that China's economy has been stabilizing and is on track to meet the government's target of 6.5 to 7 percent growth for the year.

The country's economy expanded 6.7 percent in the third quarter, unchanged from the previous two quarters.

Though China's foreign currency reserves fell to some extent, it still remains the world's largest reserve, accounting for 30 percent of the world's total.

Based on all these positive factors, the yuan's exchange rate will continue to be "kept basically stable at a reasonable and balanced level", PBOC deputy governor Yi Gang noted.