Comments from the head of China's central bank on the need to stabilize the yuan's exchange rate and U.S. Federal Reserve ambiguity on its rate policy are the main factors that led to Monday's substantial gains by the yuan against the dollar, experts said.
The yuan on Monday rose to its strongest level against the U.S. dollar this year, media reports said. After reaching 6.5300 against the dollar in early trading, the onshore yuan rate closed at 6.4944 per dollar. This represented a rise of more than 1 percent against the dollar compared to the previous close on February 5, the largest one-day increase since 2005.
The PBOC set the yuan central parity rate on Monday at 6.5118 per dollar, nearly 1 percent higher than on February 5. The central bank sets a central parity rate for daily yuan trading and the yuan is allowed to trade 2 percent higher or lower than that level.
PBOC to stabilize yuan
Experts said comments on China's exchange rate policies from Zhou Xiaochuan, governor of the People's Bank of China (PBOC), the central bank, might have contributed to the yuan's appreciation on Monday.
In an interview with domestic financial magazine Caixin Weekly posted on the PBOC's website Monday, Zhou said that the central bank intends to keep the yuan "basically stable" against a basket of currencies and the dollar.
"Zhou's remarks showed the official attitude toward the yuan," Tan Yaling, head of the China Forex Investment Research Institute, told the Global Times on Monday. "This had a certain impact on today's yuan movement."
Zhou Yu, director of the Research Center of International Finance at the Shanghai Academy of Social Sciences, echoed Tan's view, adding that another major reason is the Fed's apparent uncertainty about whether to continue its interest rate hike, which resulted in the sluggish performance of the U.S. dollar over the past two weeks.
"If the dollar strengthened against a basket of currencies, the yuan would have to weaken against the dollar so as to maintain the stability of its real effective exchange rate," Zhou Yu told the Global Times on Monday.
Moreover, the overseas markets, especially the stock markets, suffered during the seven-day Spring Festival holidays last week, so the risk hedging function of yuan assets may also have contributed to Monday's big gain, Tan noted.
But she also pointed out that the yuan still faces downward pressure.
"First, after the currency's appreciation over the past decade, the yuan needs some technical correction. Second, the government has obviously agreed to let the currency depreciate given the current trade and economic situation. Finally, China's economic slowdown is the fundamental reason behind the currency's slide," Tan said.
However, the PBOC governor on Monday dismissed concerns that China is intentionally guiding the yuan to depreciate in order to support exports and GDP growth
"[China's] commodity trade surplus has reached $600 billion and the contribution of net exports to GDP is not low, so there is no motivation to [guide the yuan to] depreciate to expand net exports," Zhou said, according to a transcript of the interview posted on the PBOC's website on Monday.
Zhou attributed the recent yuan depreciation to a stronger dollar, international and domestic events, and short-term market sentiment.
The PBOC governor also reiterated the commitment to carrying forward exchange rate reforms to pursue a system that is based on market forces and that is measured against a basket of currencies rather than just the dollar, while continuing with a managed rate float.
But the yuan's exchange rate will still depend largely on the dollar's strength, according to a report sent to the Global Times Monday by UBS Securities Asia, which also noted that the PBOC will try to keep the yuan stable.
"For the time being, the PBOC may be keen to keep the yuan relatively stable not only against the basket of currencies but also against the dollar to avoid amplifying concerns," the report said.
