The Chinese yuan is facing renewed devaluation pressure over expectations of a Fed rate hike, but a large renminbi devaluation is unlikely as China continues its market-oriented foreign exchange (FX) reform in a steady and stable manner.
The central parity rate, or the fixing rate of the Chinese currency, had been weakening since May and recorded the lowest level on Monday in five years as U.S. Federal Reserve chair Janet Yellen hinted at a possible interest rate raise in the next few months.
The depreciation in May was the largest monthly fall since last August's FX mechanism reform, raising market concerns that the Chinese government may backtrack on FX reform with greater intervention.
However, pessimists should be reassured that fluctuation means flexibility and is part and proof of the market-determined FX reform, which Chinese authorities have promised to continue implementing steadily to avoid wild fluctuations that would impact on global interests.
The renminbi has experienced several rounds of volatile adjustments since August, but exchange rate volatility has remained limited compared with late 2015 or early 2016. The market has tolerated and adapted to greater exchange rate flexibility without much panic as the formation mechanism of the fixing rate has become very transparent.
The market's increased capability in digesting greater USD-CNY fixing volatility is likely to encourage China's central bank to push through with more capital account liberalization and FX reform measures.
The adjustment of the system from a highly managed FX regime to more of a floating one will be a gradual process. The current fixing framework -- tracking U.S dollar movements against China's trading partners -- serves the interests of China and the world at large.
China has allowed greater flexibility in the renminbi exchange rate while maintaining its stability as keeping the transition stable is beneficial to both China and its trading partners.
There is no need and limited room for China to purposely depreciate its currency to boost exports, as China is already the world's largest trading nation and renminbi uncertainty will have huge impacts on the global financial and commodity markets, which will eventually affect China itself.
Meanwhile, the renminbi should be allowed to move moderately within a proper range. The market will gradually adapt to exchange rate volatility and strengthen FX risk management, providing a stable financial environment for Chinese and global growth and reform.
The renminbi exchange rate is becoming increasingly flexible and reflective of market forces. China is committed to making it more market-determined and increasing its two-way flexibility within a reasonable range.
The yuan may show more fluctuations as the dollar moves, but the large depreciation seen earlier this year is unlikely to recur and the renminbi will maintain stable in the long run.
