Gov't intervention not needed: expert
The yuan's weakening trend continued on Wednesday both in offshore and onshore markets, but experts said the government could tolerate such fluctuations and should focus on boosting the real economy.
On Wednesday, the offshore yuan exchange rate slipped to the weakest point against the U.S. dollar since 2009, while the onshore rate depreciated by about 0.6 percent from the closing quote of the previous trading day.
The People's Bank of China (PBC), the central bank, announced that the yuan's central parity rate against the U.S. dollar would be 6.5314 on Wednesday before the market opened, 145 basis points weaker than the previous day and the lowest level in nearly five years.
The yuan has been edging down since the PBC adjusted the system for fixing the central parity rate in August to better reflect market forces.
But the slide has been greater recently, with the central parity rate edging down for seven straight trading days.
Reasons for the slide
Sun Lijian, deputy director of the School of Economics at Fudan University, told the Global Times on Wednesday that one of the reasons for the yuan's recent depreciation is that the real economy in China is facing downward pressure, leading to limp investment.
Major domestic manufacturing enterprises saw their profits fall 1.9 percent year-on-year from January to November 2015, according to the National Bureau of Statistics on December 27.
Another reason for the yuan's weakness, Sun said, was the market's response to the fact that the U.S. Federal Reserve (Fed) ended its quantitative easing (QE) program, a policy that boosts money supply, in October 2014.
This was followed by a decision by the Fed to hike interest rates in December 2015, which strengthened the dollar and was seen by global markets as a signal of economic recovery in the U.S.
"As a result, a large amount of capital flowed to the U.S. market, causing the currencies in many other countries, including China, to depreciate," Sun noted.
The yuan's depreciation in the onshore and offshore markets has prompted State intervention, according to overseas reports. On Tuesday, Reuters cited an anonymous source as saying that State-owned banks were offering dollar liquidity on behalf of the PBC to help control the pace of the yuan's depreciation.
Under control
According to Sun, the yuan's depreciation is still within a reasonable range, and he suggested that the government take a hands-off attitude toward currency movements.
"The government can intervene in the foreign exchange market to stabilize the yuan's exchange rate. But this also carries some risks, such as prompting capital speculation," Sun noted.
He said that the government should focus on improving China's real economy.
"When the real economy improves, the yuan will also get stronger," he said.
Liu Dongliang, an analyst at China Merchants Bank, said that the yuan's fluctuations in recent days have been "normal" by international standards.
"Most major currencies fluctuate by about 0.5 percent each day, and the yuan's average daily fluctuation in recent days has not reached that level yet," Liu told the Global Times on Wednesday.
Liu also estimated that the yuan would depreciate by 5 to 10 percent in 2016.
Yi Gang, deputy governor of the PBC, said at a press conference on December 1 that China is capable of keeping the yuan's exchange rate at a reasonable level and that there was no basis for continued depreciation.
Shen Danyang, spokesperson for the Ministry of Commerce, said during a press conference in August 2015 that the fluctuations in the yuan's exchange rate would benefit labor-intensive enterprises.
Shen also said that as the risks of currency fluctuation are intensifying in China, domestic enterprises should strengthen their management of exchange rate risks, such as enlarging the scale of their yuan-denominated trade settlement.
