The yuan's reference rate rose slightly on Wednesday after hitting a six-year low against the U.S. dollar on Tuesday. The yuan's depreciation sparked concerns that the Chinese currency might spiral out of control. Those concerns, according to several experts interviewed this week by the Global Times, are unfounded. The yuan's recent depreciation has more to do with the dollar's appreciation than any problems with the domestic economy, they said, though, China's ongoing economic transformation has had some influence on the currency. Still, they see the recent depreciation of the yuan as "orderly" and don't believe it will get out of hand.
The yuan's depreciating trend against the U.S. dollar became evident again in October, not long after market worries had somewhat eased over the fluctuating Chinese currency, which has been on a downward path for more than a year.
On Tuesday, the yuan's central parity rate, also known as the reference rate, weakened by 54 basis points to 6.7744 against the U.S. dollar, touching a six-year low.
On Wednesday, the People's Bank of China, the country's central bank, set the reference rate slightly stronger at 6.7705 yuan per dollar, after setting it weaker on the previous three trading days - including at 6.7690 on Monday and at 6.7558 on Friday.
From October 14 to October 20, a relatively stable period, the yuan weakened every other trading day. Prior to that, the currency lost ground against the greenback every trading day from September 28 to October 13.
The yuan's central parity rate against the U.S. dollar is based on a weighted average of prices offered by market makers before the opening of the interbank market. The yuan is allowed to rise or fall within a 2 percent range of the central parity rate each trading day.
The Global Times spoke to several domestic currency experts on Monday and Tuesday, all of whom said that the yuan's recent depreciation makes sense considering what's going on in the global currency market.
"I would describe the yuan's recent depreciation as 'orderly,'" said Xu Gao, chief economist at China Everbright Securities Co. "It was very different from the currency's depreciation in mid-2015."
Although the yuan has been depreciating against the U.S. dollar since mid-2015, it has remained firm against many other currencies, said Lin Caiyi, chief economist at Shanghai-based Guotai Junan Securities Co.
"It's one-sided to say that the yuan is weakening just because it is depreciating against the U.S. dollar," Lin told the Global Times on Tuesday.
Due to the dollar
The currency story in October, Lin said, is "more about the strengthening dollar than the weakening yuan."
The yuan's recent depreciation has been a direct result of the strengthening dollar, as market expectations are rising for an upcoming interest rate hike by the U.S. central bank, Xu said.
"The U.S. Federal Reserve seems inclined to raise U.S. interest rates in December," Xie Yaxuan, an analyst with China Merchants Securities, said in a statement sent to the Global Times on Monday. "This has provided the impetus for the dollar's jump."
The U.S. Dollar Index, which gauges the value of the U.S. dollar against a basket of currencies, including the euro and the Japanese yen, has risen about 3 percent in October, Xu said.
The U.S. Dollar Index slipped 0.24 percent to 98.49 by 5:52 pm Beijing time on Wednesday.
Xu stressed that there were completely different forces driving the yuan's decline in October and in 2015, which refutes some market speculation that the recent depreciation might descend into a violent trend similar to what happened in 2015.
On August 11, 2015, China's central bank devalued the yuan by about 2 percent against the U.S. dollar to 6.2298. It was the Chinese currency's biggest one-day drop in more than two decades.
"The sudden slide following the government's reform of the central parity system set off a mood of apprehension in the domestic market, which in turn caused the situation to get out of hand," Xu said.
The yuan depreciated by about 6 percent from August 11, 2015 to the end of January, during which the U.S. Dollar Index grew by about 2 percent, Xu said.
By comparison, the yuan's depreciation in October is more in line with the strengthening U.S. dollar, Xu noted, which shouldn't pose the same risks to domestic and global financial markets as it did in 2015.
The Chinese mainland stock markets, for example, have been stable in October. On Wednesday, the Shanghai Composite Index fell 0.5 percent to 3,116.31 points.
Economic transition plays a role
China's ongoing economic transition is another reason for the recent weakening of the yuan, said Liu Xuezhi, a senior analyst at Bank of Communications.
Liu specifically noted the decline in the manufacturing sector. "This has led to lower investment returns, causing capital to flow out of China, adding to market expectations for the yuan to depreciate," he said.
Nonetheless, as long as the central government can keep the economy growing faster than 6.5 percent, the overall economy will only have a mild effect on the yuan's exchange rate, Liu said.
China's GDP grew by 6.7 percent year-on-year in the first three quarters in 2016, according to data from the National Bureau of Statistics in October.
Xie added that the recent policies to cool down the real estate market have also caused domestic investors to be pessimistic about the country's economic prospects in the first half of 2017, adding to pressure on the domestic currency market.
Xu predicted that the yuan's dollar exchange rate will hover around 6.8 until the end of the year, and will weaken by another 3-5 percent in 2017.
Although the yuan will continue to depreciate against the U.S. dollar in the future, the decline won't get out of hand. "We don't need to be panic," Liu said.
Still, Liu declined to give a precise prediction for how far the yuan will fall against the dollar in 2016. Liu also stressed that a depreciating yuan has both advantages and disadvantages.
"It will boost exports, and curb the trend of consumption outflows, as the cost of buying things overseas will rise accordingly," he said.
Lin pointed out that although the yuan has been depreciating against the U.S. dollar, it has actually appreciated against other currencies in the recent months.
"The yuan's performance isn't bad at all considering how much some other currencies have depreciated against the U.S. dollar," Lin said.
On Wednesday, the yuan's central parity rate was 8.2472 against the British pound, compared with 9.6159 at the end of 2015.
