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RMB depreciation normal, but not long-term trend
2008/12/04

Chinese economists said they believed the recent yuan devaluation was caused by "objective factors," but the currency's long-term trend should not face a reversion, as strategic China-U.S. economic talks opened here Thursday.

China's currency weakened on Thursday. The yuan traded at 6.8837 per U.S. dollar as of 14:30 p.m. on over-the-counter market, from 6.8830 on Wednesday. It dropped to as low as 6.8845 per U.S. dollar in the morning.

The central parity rate of the yuan was 6.8502 yuan to the U.S. dollar on Thursday, according to the China Foreign Exchange Trading System, the same as Wednesday.

The yuan's central parity rate is based on a weighted average of market makers' price inquiries before the market opens on each business day. The rate is allowed to fluctuate within a band of 0.5 percent on either side of the mid-point.

The State Council, or the Cabinet, said it would use a series of means, including reserve requirement ratios, interest rates and foreign exchange rates to ensure ample liquidity for the banking system.

The Cabinet announced the decision late Wednesday at an executive meeting, presided over by Premier Wen Jiabao. Last month, it has unveiled a 4-trillion-yuan economic stimulus package, which aimed to offset adverse global economic conditions by boosting domestic demand.

The statement came amid market speculation that the yuan might depreciate against the U.S. dollar to help aid exports, which was battered by slackening external demand.

The yuan's reference rate has gained more than 6 percent against the greenback this year, but it was up less than 0.1 percent in the second half.

A "slight and mild" yuan depreciation was necessary because the currency has appreciated too fast since its peg to the dollar ended in July 2005, said Hua Min, department chief of world economy with Shanghai-based Fudan University.

A weaker yuan could help boost exports during the crisis, Hua said.

Tan Yaling, a research analyst with the Bank of China, believed the recent movement of the yuan was "normal and rational" market behavior as the currency has gained nearly 20 percent against the U.S. dollar since July in 2005.

However, the possibility of a periodic depreciation could not be ruled out, said Ding Zhijie, deputy dean of the finance school with the University of International Business and Economics.

According to Ding, the depreciation pressure came from the strengthening U.S. dollar and concerns about downward pressure on the economy as the financial crisis, which has evolved into an economic crisis, weighed on the economy.

A steep depreciation would not be possible currently, forecast China Academy of Social Sciences economist Liu Yuhui, which was likely to cause a range of negative impacts, including increasing capital outflow and deteriorating trade friction and protectionism.

Thursday also marked the first day of the fifth China-U.S. Strategic Economic Dialogue. A range of economic issues would be discussed, including the U.S. economy's recession and China's reduced economic growth.

Chinese Vice Premier Wang Qishan and the U.S. Treasury Secretary Henry Paulson co-chaired the opening dialogue on Thursday morning.

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