The Chinese currency Renminbi, or the yuan, is expected to keep stable with the support of the Chinese economy and intervention of China's central bank despite its recent depreciation against the U.S. dollar.
For starters, there is no need to be surprised at the yuan's volatility.
On the one hand, China's market-oriented currency reforms allow the yuan's exchange rate to fluctuate according to market supply and demand.
On the other, it is a managed floating currency system, which means China will intervene to some extent in case of drastic fluctuations to minimize its impact on the real economy.
Secondly, the fundamentals of the Chinese economy do not support a further sharp depreciation against the U.S. dollar.
Regarding the balance of international payments, there is no severe imbalance for both China and the United States. In the first three quarters of 2015, China's current account surplus was for 2.6 percent of its gross domestic product (GDP), while the U.S. current account deficit accounted for 2.75 percent of its GDP.
Although there is wide expectation that the U.S. Federal Reserve will continue to raise benchmark interest rate, the current situation is forcing the Fed to be more cautious in making a move.
Despite a solid performance in its jobs market, the United States must still contend with low inflation, a slump in oil prices as well as both weak retail sales and manufacturing exports, which will hinder the implementation of its goals of increasing investment and elevating its inflation rate to a moderate 2 percent.
Furthermore, the Fed will need more time to evaluate the impact of global financial turbulence on the U.S. economy, which was caused by the December interest rate hike.
Meanwhile, China may see slow economic growth in the short term, but it still has the potential to maintain relatively high productivity growth, much more than that of the United States, which firmly supports the exchange rate of the yuan against the dollar.
Thirdly, the Chinese government has no intention of boosting exports by devaluing the yuan.
A decrease in exports has become a global issue due to a sluggish world economy. Among major economies, China suffered a relative small degree of decline in exports.
Even if the yuan devalues against the dollar to some extent, the synchronous depreciation of other currencies, some of which by a wider margin, will make it difficult for China to increase its exports in the short term.
Furthermore, China has a currency reserve of 3.3 trillion U.S. dollars and one of its functions is to keep the currency market stable.
The People's Bank of China (PBOC), China's central bank, can adopt a series of measures to keep the yuan's exchange rate stable.
For instance. The PBOC can buy and sell the yuan and the dollar through its correspondent banks to reduce the volatility of the yuan when necessary.
All in all, with the fundamentals of the Chinese economy still strong and the intervention measures of the PBOC, there is no reason to believe the yuan will devalue sharply in the future.
