The recent relative volatility in the exchange rate of Chinese currency Renminbi (RMB) should be viewed from a longer-term perspective and put in the larger context of China's market-based financial reforms.
There is simply no basis for the RMB, or yuan, to devaluate over the long term as the Chinese economy has been robust. The slowdown in economic growth is justifiably within expectations of decision-makers even though it had surprised some of the players on the market.
The Chinese economy grew by 6.9 percent last year, slower than the growth recorded in the previous years, but it is still at quite a high level.
"Most countries would envy a 6.9 percent growth," Microsoft founder Bill Gates said at the World Economic Forum in Davos, Switzerland recently. "I have a lot of confidence in China, partly because they take a long-term view, and partly because they look what other countries are doing."
China has been restructuring its economy, and the government encouraging innovation, pushing through reforms by streamlining procedures and making it much easier to register new businesses in the country.
Besides, China has a respectable domestic market and sharp technological edge in manufacturing, as industry players put it.
Aside from its enviable domestic market, the Asian country boasts huge demand yet to be tapped, as most of its flourishing cities, often with a population of millions or hundreds of thousands, are still in need of substantive investment in infrastructure and environment protection.
As for the labor market, "people can easily find jobs if they are not lazy," an international student at a university in eastern China said on a popular social media platform, citing it as one of the best things about the country.
China recently announced plans to reduce overcapacity in sectors such as coal, steel and cement, obviously aware that the workers to be laid off won't be a threat. Arrangements have been made to help them through the difficulties after losing their jobs in the forthcoming change.
Back to the currency, China does not have a policy to devaluate the yuan over the long term. China, as a responsible player, has promised not to carry out competitive devaluation to stimulate its export. This is a commitment. Take a look at the track record of China.
The truth is that China is now in the process of moving towards an exchange rate formation mechanism with more reference to a basket of currencies. "This means that the value of the RMB will be kept basically stable against the whole basket," Ma Jun, chief economist of the People's Bank of China's research bureau, said in a recent interview.
China will guide the market to form a yuan/dollar rate, so as to help stabilize the yuan's value against the currency basket.
At the current stage, the yuan's exchange rate is not pegged to the U.S. dollar nor is it allowed to float in an unchecked way. China will introduce a mechanism to properly limit daily yuan/dollar rate fluctuation, Ma said.
There are signs the short selling of the yuan has recently declined, just as predicted.
Chinese authorities have also made clear that the exchange rate regime will continue to be based on market supply and demand and with reference to a basket of currencies.
Tommy Xie, an economist with Singapore-based OCBC Bank, said that the direction of the RMB exchange rate formation mechanism reform is clear and that the central bank of China "has been more predictable rather than unpredictable."
The change of the yuan exchange rate formation mechanism is part of the market-based financial reforms China is pushing through, and it is not easy to push through such reforms. In this context, it is understandable to have short-term fluctuations.
Now it is a managed float mechanism but it is increasingly based on the market, said Zhu Min, deputy managing director of the International Monetary Fund.
Last but not the least, it is important to bear in mind that China can defend its currency against speculators, whose banal trick is to spread rumors and repeat their so-called predictions of a "hard landing" when the market sentiment is gloomy.
In one word, it is fair to say that the spillover effects of the Chinese market fluctuation and potential risks have been exaggerated, and the fundamental reason for the recent global market jitters is that global growth have not recovered to a level that can support monetary tightening.
