More flexibility in the yuan, less public worries
China's central bank exchange rate reform, which took effect one year ago, has yielded positive results, as the yuan exchange rate has become much more market-oriented and public panic over depreciation of the yuan has cooled down, experts noted on Thursday.
The yuan rose 275 basis points to 6.6255 against the US dollar Thursday, the largest single increase in the past months, data from China Foreign Exchange Trading System showed.
The RMB exchange rate index based on a Special Drawing Right (SDR) basket, a major measurement for the yuan exchange rate, closed at 95.99 on July 29, an increase of 0.24 percent from the end of June, according to a statement posted on the website of the People's Bank of China (PBOC).
The yuan has depreciated by 8.8 percent against the dollar since the exchange rate reform began on August 11, 2015, when the central bank changed the mechanism for the yuan's daily fix rate against the dollar, saying that it would reference the spot rate on a basket of currencies and the previous day's closing.
"Previously, the spot rate set by the central bank deviated from the market trading price, which raise questions over transparency and authority," Tan Xiaofen, vice director of the International Finance Research Center at the Beijing-based Central University of Finance and Economics, told the Global Times on Thursday.
"The new method is anchored to market demand, and will contribute to the stability of the yuan in the long run," Liu Dongliang, a senior analyst at China Merchants Bank, told the Global Times on Thursday, noting that this move shows that the Chinese government has gradually learned how to communicate effectively with the market.
"The shift in exchange rate shows that the past 10 years of the yuan's unilateral surge in the exchange market has ended, and the reform has made the currency exchange rate more flexible," Tan said.
Tan noted this move will also bring more opportunities for both domestic and foreign investors.
Another positive change is that market worries over the yuan's short-term fluctuations have eased, experts noted.
"At first, the adjustment sent widespread panic through the capital market as well as in domestic enterprises that deal with foreign trade. But the situation has ameliorated as the public has gradually reached a consensus that the trend is normal," Liu said.
Firms have learned to use various financial tools to ward off such risks, like foreign currency tools and forward exchange transaction, Liu noted.
Interest rate fluctuation
Following the announcement of the reform last year, the yuan's value against the dollar dropped by 3 percent within three days, according to domestic news portal sohu.com.
Zhang Xiaohui, PBOC's assistant governor, said in the report that the move relieved the accumulative devaluation pressure the yuan was facing for a long time.
In November 2015, the IMF's announcement to include the yuan into the SDR firmed the exchange rate market, Liu said.
A second and third round of depreciation took place in the January and May-June period this year, mainly due to expectations of the US Federal Reserve's interest rate hike and the UK's exit from the European Union.
However, despite the progress, the problem of cross-border capital outflow from China has posed a potential challenge for regulators.
Liu noted that the solution to the problem will come by raising consumers' confidence in the market.
The pace of capital outflow has tapered off in recent months, with net foreign exchange transactions by commercial banks at $12.5 billion in May, down 47 percent from April, Xinhua News Agency reported.
In the future, the central bank also plans to introduce the market factor to determine the exchange rate, and improve its calculation mechanism, according to a report published by the PBOC on Thursday.
"It is likely that the exchange rate reform will further develop, and that the yuan will go up and down, but on a relatively stable level," Tan said.
