The recent sharp depreciation of China's currency is just a temporary correction after a change in the country's central parity rate formation system.
The central bank decided to let the market have a greater say in forming yuan's central parity rate against the U.S. dollar on Tuesday, taking into account previous closing rate, demand and supply in the interbank market and rate of major currencies.
The market responded with a 4.66 percent depreciation in the yuan-dollar central parity rate from Tuesday to Thursday, fueling rumors about government manipulation to bolster flagging export and a possible currency war.
The drastic fall, however, is just temporary growing pains as the market discovers a reasonable value for the currency.
The previous flawed mechanism failed to stay true to market realities and caused wide differences between the central parity rate and real market rates, mounting huge depreciation pressure on the central parity rate.
The plunges were well grounded, as the yuan has been one of the strongest currencies in the world for years. Since 2005, the yuan's real effective exchange rate appreciated more than 55 percent.
This year alone witnessed a further appreciation of about 3 percent in yuan, against the backdrop of a strong dollar as the U.S. economy enjoyed steady recovery and the Federal Reserve mulls to raise interest rates.
Expectations for a dropping yuan were also fueled by unexpected surges in China's money supply and new loans last month.
Though the correction process has been steeper than the general market expectation, a prolonged depreciation is not going to be the new normal for the yuan.
With a more open, transparent and market-based mechanism, the guiding rate will soon arrive at a proper level that wins market consent and fluctuates along with market forces.
In the long haul, the yuan will continue its strength as in past years on the back of huge current account surplus and sound economic fundamentals.
In the first seven months, China continued to see a whopping surplus in goods trade, a major component of current account surplus, providing solid foundation for a strong yuan due to large demand.
Despite downward pressures, China's 7 percent economic growth in the first half of the year was in line with government targets and outpaced most economies in the world, meaning the country will continue to be a magnet for foreign investment.
Meanwhile, with the largest foreign exchange reserves stockpile in the world, the Chinese government also has full competence to ward off irrational volatility and ensure stability in the currency's rate.
The temporary drops should not be over-interpreted, as a market-oriented mechanism will offer equity, predictability and confidence in the long term.
