Experts say depreciation won't hurt economy
China's central bank set the yuan's reference rate against the U.S. dollar to its lowest since 2011 on Monday, due to expectations that the U.S. will soon raise interest rates, but experts said the Chinese currency would not depreciate much more for the next few months.
The People's Bank of China (PBOC) lowered the reference rate to 6.5784 yuan against the dollar from 6.5490 yuan on Friday.
The PBC allows the yuan to fluctuate within a 2 percent range of the central reference rate during each trading day.
The central bank sets the rate based on a basket of currencies and takes into account the yuan's closing price on the previous trading day. In the basket, the U.S. dollar is most crucial, as its fluctuations exert great influence over the yuan, said Liu Jian, a senior analyst at Bank of Communications.
All things being equal, the dollar increases in value against the yuan and other currencies when the U.S. raises interest rates.
"The expectation that the U.S. Federal Reserve will raise rates contributed the most to the drop in the yuan," Liu told the Global Times.
The yuan depreciation is the normal expectation of financial market, rather than the manipulation of the government, said Tan Xiaofen, vice director of International Finance Research Center at Central University of Finance and Economics.
The rising expectations for a U.S. interest rate hike within the next few months came after Federal Reserve Chair Janet Yellen's speech at Harvard University on Friday.
"It's appropriate - and I've said this in the past - for the Fed to gradually and cautiously increase our overnight interest rate over time. Probably in the coming months such a move would be appropriate," Yellen said, Bloomberg reported on Saturday.
The dollar index, which measures the greenback against a basket of currencies, increased 0.6 percent on Friday.
The dollar is on track for its strongest monthly performance since November.
A slight depreciation of the yuan will not have much of an effect on the economy, though it may influence exports and capital flows, Tan said.
In the first three months of 2016, China's foreign exchange settlement deficit fell by $39.6 billion from the previous quarter to $124.8 billion, according to data from the State Administration of Foreign Exchange.
The yuan's depreciation will help it stabilize against other currencies in the basket, Tan said.
The pressure on the yuan to depreciate will persist into the latter half of this year as the Federal Reserve is expected to continue to raise rates and the outlook for the country's economy is uncertain, Liu said.
Tan noted that the yuan is unlikely to depreciate to a large extent.
