Experts divided on yuan’s future

Experts divided on yuan's future

The yuan's central parity rate against the U.S. dollar hit a new low of 6.3456 on Aug. 13. The yuan has depreciated over 0.4 percent against the U.S. dollar in the past two months, and the yuan's exchange rate against the U.S. dollar in the spot market has dropped below the psychologically important 6.38-mark many times in the past month. The offshore three-year yuan non-deliverable forward (NDF) contract traded at 6.7015 per dollar that day, equivalent to the yuan depreciating 5.6 percent.

Liu Jiming, an expert on international financial markets at China CITIC Bank, attributed the yuan's depreciation to three factors.

First, China's economic slowdown over the past few quarters makes overseas investors worried about a possible hard landing.

Second, China's capital account surplus is shrinking, and the country is even facing increasing risks of capital account deficit, placing the yuan under greater depreciation pressure.

Third, the U.S. dollar is becoming stronger due to risk aversion amid the European debt crisis, thereby driving the yuan's exchange rate down.

Analysts predict that the yuan's spot rate against the U.S. dollar is very likely to drop below 6.4 this year.

Liu Dongliang, a senior financial analyst at China Merchants Bank, said that given the sluggish external demand and deteriorating European debt crisis, China's central bank has probably softened its stance on the yuan's exchange rate. In other words, the yuan may be allowed to depreciate to a moderate extent in order to boost exports.

However, many people remain optimistic about the medium- and long-term prospects for the yuan.

He Jun, a senior researcher at Anbound Consulting, said that as long as China maintains stable economic growth, the yuan will return to the track of appreciation instead of depreciating sharply, and the currency's international status will not be affected.

Foreign currency assets grow in popularity

The depreciation of the yuan has caused profound changes in domestic companies' settlement and sale of foreign exchange. Specifically speaking, the private sector has increased U.S. dollar positions, and certain companies that hold large amounts of foreign currency have taken a cautious wait-and-see approach.

Hou Liping, an analyst at Bank of China, said that the U.S. Dollar Index is still rising as the European Central Bank still has not taken practical countermeasures, and domestic demand for the settlement and sale of foreign exchange naturally follows the trend of the U.S. dollar.

More Chinese companies and individuals are expected to favor domestic currency debt and foreign currency assets in the short term, Hou said.