U.S. Fed moves will affect China's currency in 2017: experts
The yuan continued its depreciation trend against the U.S. dollar in 2016, with approximately a 6.7 percent drop during the year. The Global Times talked to several experts on this issue, who said that such depreciation is understandable as it is the yuan's reaction to a stronger dollar. They also predicted that the yuan would continue to depreciate in 2017, though to a lesser extent compared with this year.
The yuan has undergone a bumpy year, with strong depreciation at the beginning and the end of the year, and a stable trend in the middle. Experts suggest the currency will continue to edge down in 2017, mainly because of external factors such as a strengthening dollar.
The U.S. Federal Reserve announced on December 15 that it was increasing its benchmark interest rate by a modest quarter-point to a still-low range of 0.5 percent to 0.75 percent, its second rate hike in the past decade.
Overseas media has cautioned the negative impact this move might have on China. On December 12, Forbes published an article saying that a Fed rate hike was "bad news" for China, suggesting the move will increase capital outflows and generate additional growth headwinds for the country.
A CNBC report on December 15 also cited an overseas economist saying that China would be the "biggest casualty" if the U.S. continued increasing the interest rate as "there's so much money just waiting to leave."
The U.S. interest rate hike came at a time when the yuan has been spiraling down since mid-2015, when the government adjusted the mechanism for the currency's central parity system to give place to more market forces.
Bumpy year
The yuan's exchange rate slumped by roughly 6.7 percent against the U.S. dollar in 2016. The currency's exchange against the dollar stood at 6.5032 on January 4. On Thursday, the yuan's rate hit 6.9435.
Xi Junyang, a professor in the Department of Finance at Shanghai University of Finance and Economics, told the Global Times on December 15 that the depreciation scale of the yuan has been a bit too wide this year, as the yuan doesn't normally fluctuate beyond 5 percent annually.
On August 11, 2015, following the exchange mechanism adjustment, the yuan's central parity rate fell by nearly 2 percent, the largest single-day drop in about two decades. After the yuan remained stable for several months, it depreciated strongly around the beginning of 2016, then flattened out again with a little appreciation. In May, it started its depreciation trend again, which has become violent since October.
Zhou Yu, director of the Research Center of International Finance at the Shanghai Academy of Social Sciences, told the Global Times on December 15 that the yuan's depreciation is "understandable" as it conforms to the operational rules of the current exchange rate mechanism, which unpegged the yuan from the dollar, and therefore the yuan's depreciation is a direct result of a rising U.S. dollar.
The U.S. dollar has been growing stronger in recent months. The U.S. Dollar Index, which gauges the value of the dollar against a basket of currencies, including the euro and the Japanese yen, stood about 98 by the end of 2015. It rose to 102.95 by 5:00 pm on Thursday.
According to Zhou, another reason for the currency's depreciation is an increase in capital outflows, which began at the end of 2014.
"Normally, the yuan's depreciation scale is in line with the speed of capital outflow. The months when capital flow was a little strong, such as at the beginning of this year, the depreciation scale was also stronger than in other months," he said.
Zhou also noted that the government has used the country's foreign exchange reserves to support the yuan, the reason behind the fast-declining reserves in China in recent months.
China's foreign exchange reserves stood at $3.05 trillion by the end of November, down $69 billion from the end of October, statistics from the People's Bank of China showed.
Zhou said that if the foreign exchange reserves fall beyond a certain level, the government would stop using it to regulate the exchange rate and will further let market forces decide the exchange rate.
Further slump
Zhou predicted that in 2017 the yuan's exchange rate would stand at 7-7.5 against the U.S. dollar.
One factor that will influence the yuan's trend in 2017 is the U.S. Federal Reserve's further interest rate hike moves, Liu said.
"The recent interest rate hike will have only limited impact on the yuan's exchange rate, as it was just a slight increase, but the market expectations are that the U.S. government will continue to raise the interest rate of the U.S. dollar in 2017, and this will exert pressure on the yuan," he noted.
At the same time it announced the rate increase, the U.S. Federal Reserve also said it might raise rates three times in 2017.
Liu Dongliang, an economist at the China Merchants Bank, said in a statement sent to the Global Times on December 15 that the yuan's trend will largely hinge on the prospects of the U.S. dollar. "If the dollar rises moderately in 2017, the yuan might fall to between 7.1-7.15 against the U.S. dollar in the next year," he noted.
Xi also said the trend of the yuan will be affected by Donald Trump's policies related to China.
"If Trump adopts harsh policies that might hurt domestic exports, the [Chinese] government might allow the yuan to depreciate strongly to offset the influence of such policies," he noted.
But Zhou explained that if the overall economy in 2017 improves, which is likely to happen considering recent economic data, the yuan is unlikely to slump too much.
Data released by the National Bureau of Statistics in December showed that important economic sectors in China such as industry and investment are stable in November, with highlights in the consumption sector.
"Many economic problems, like local government debt, have been solved to a great extent. The consumption area is also showing good signs. The only minus point is the real estate sector, which might suffer as a result of the government regulation measures," Zhou said.
Xi also noted that there are not any domestic factors that might drag the yuan down. "I predict the yuan will spiral down in 2017, but will to a much lesser extent compared with this year," he said.
