Currency weakens again after launch of new index
The People's Bank of China (PBC), China's central bank, offered reassurance on Monday that the yuan exchange rate will be "basically stable," after the currency weakened to a four-year low amid speculation that the central bank has given a "green light" for more devaluation.
In an article posted on its website on Monday, the PBC said conditions in the medium and long term will allow the yuan "to maintain basic stability at a reasonable equilibrium level."
The PBC argued that although domestic economic growth has slowed, it remains at a "relatively high level" compared to other economies.
Also, China will be able to maintain a trade surplus thanks to its higher labor productivity and the current low commodity prices, the central bank said, noting that China's trade surplus reached $539.1 billion in the first 11 months of the year.
Moreover, with the yuan having been included in the IMF's Special Drawing Rights currency basket, yuan-denominated assets held by foreign entities will increase, the PBC said.
Furthermore, the country has abundant foreign exchange reserves, sound fiscal conditions and a stable financial system, the PBC said, which will also help to keep the yuan stable.
Four-year low
The PBC's comments on Monday came after the yuan had weakened to a four-year low against the US dollar. Prior to the market's opening on Monday, the China Foreign Exchange Trading System (CFETS) set the central parity rate for onshore yuan trading at 6.45 per dollar, the lowest level since July 2011, according to the Xinhua News Agency.
Liu Xuezhi, an analyst at Bank of Communications, told the Global Times Monday that the yuan devaluation on Monday might also have something to do with the CFETS' launch of a new exchange rate index for tracking the yuan.
The CFETS announced on Friday that it would shift its way of tracking the value of the yuan with a new trade-weighted index that compares the yuan to a basket of currencies rather than just the U.S. dollar.
The move has been viewed by some investors as offering a "green light" for further yuan devaluation, with Monday's yuan drop showing this, Reuters reported on Monday.
The PBC on Monday defended the move and said China is pursuing currency policies that are based on market demand.
The central bank also stated that the market needs time to adjust to the new way of tracking the yuan.
Not a green light
Analysts said the PBC is not deliberately trying to let the yuan depreciate.
"Though the yuan continues to face depreciation pressure, I don't think it's the central bank's intention to artificially lower the value of the currency," Liu told the Global Times, noting that the new index offers a more transparent and accurate way of tracking the yuan.
Fluctuations in the yuan exchange rate are mainly based on the global and domestic economies, rather than being guided by the PBC, said Xiong Aizong, a research fellow with the Institute of World Economics and Politics at the Chinese Academy of Social Sciences.
"The move is just a change of method and it doesn't show the PBC is encouraging depreciation or appreciation of the yuan," Xiong told the Global Times on Monday.
However, the intention to pull back from the yuan's peg to the US dollar is clear, Xiong noted.
This can prevent the yuan from being "forced" to follow the dollar in appreciating, Xiong said, with this week's U.S. Federal Reserve meeting expected to decide on an interest rate hike, a move that would further boost the dollar.
Xiong said that the yuan would continue to depreciate in the short term, but he agreed with the PBC that the exchange rate would be stable in the long run.
