Two-way yuan fluctuation normal: SAFE

Two-way fluctuation in the yuan will become the norm, the State Administration of Foreign Exchange (SAFE), the country's foreign exchange regulator, said Wednesday, following a recent weakening of the yuan against the US dollar that has caused concern among investors.

The yuan's recent fluctuation is a result of fine-tuning of market trading strategies, but it remains within the normal range, unlike currency swings in developed markets and other emerging markets, SAFE said in a statement posted on its website.

Market participants should take the initiative to make adjustments accordingly, the statement said.

The People's bank of China (PBOC), the central bank, fixed the yuan's central parity rate at 6.1192 against the US dollar on Wednesday, weakening from Tuesday's 6.1184.

The yuan had declined against the dollar for five consecutive days as of Monday, according to statistics from the PBOC.

The sustained weakness of the yuan was seen as unusual, as the Chinese currency has generally maintained a strengthening trend against the dollar in recent years, despite repeated pledges by the central bank to boost the yuan's two-way fluctuations.

"SAFE's emphasis on the two-way fluctuations becoming regular after the recent drop in the yuan's exchange rate indicates a reversal of the long-standing perception of sustained appreciation of the currency," Liu Dongliang, a senior currency analyst at China Merchants Bank Co in Shenzhen, said Wednesday.

The yuan's spot exchange rate has depreciated by around 1.35 percent against the dollar since the yuan hit a new high against the dollar on January 14, while during 2013 the yuan had appreciated by around 3 percent against the dollar, a research note from JPMorgan Chase & Co said Wednesday.

The volatility of the yuan will increase as a consequence of the new norm of two-way fluctuations, but the currency's appreciation may continue in the long term, albeit at a slower pace, said Liu of China Merchants Bank.

The yuan is likely to appreciate around 2-3 percent against the dollar over the next year, according to his estimation.

Holding a similar viewpoint that the slide in the yuan will only be temporary, Zhu Haibin, chief China economist at JPMorgan Chase & Co in Hong Kong, said in the research note Wednesday that a slowing Chinese economy and the central bank's adjustment of its foreign exchange policy were the main factors contributing to the decline.

"If short-term capital inflows diminish, the depreciation will probably halt," Yao Wei, a Hong Kong-based economist with Societe Generale SA, said in a research report on Wednesday.

"The recent yuan move is intended to discourage arbitrage," the note said.

The SAFE statement also noted that the country had recently seen massive capital inflows, but it dismissed the possibility of sustained heavy capital outflows in the future.

The regulator said two-way capital flows would be normal, as uncertainties may continue to weigh on external environments while the yuan's exchange rate is trending toward reasonable and balanced levels.

Some market watchers forecast further moves by the central bank in managing the currency.

The PBOC is likely to take bolder steps to reform the yuan's exchange rate regime, said Yao of Societe Generale, who also forecast a widening of the yuan's trading band.