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Solid economic fundamentals to support yuan’s strength

Updated: Oct 26,2016 10:05 AM     Xinhua

BEIJING — Despite looming depreciation pressure on the yuan, China’s sound economic fundamentals are set to determine that the soon-to-be global currency remains stable in the long run.

The yuan continued to weaken against the US dollar on Oct 25, breaking its six-year low for a third straight trading day. The central parity rate softened by 54 basis points to 6.7744, according to the China Foreign Exchange Trading System.

It was the weakest level since September 2010 as rising market expectations for a US interest rate hike saw the dollar maintain its gaining streak.

The slip on Oct 25 narrowed markedly from 132 and 247 basis points on Oct 24 and Oct 21, respectively.

The currency has depreciated by 1.45 percent against the greenback this month.

Analysts mainly attributed the lackluster performance to a surging dollar, but despite short-term volatility the chance of a sharp depreciation is slim due to stable economic growth, a large trade surplus, ample foreign exchange (forex) reserves and the yuan’s internationalization.

“The yuan’s recent weakness is a reflection of the US dollar’s strength,” said Liang Hong, researcher with investment company CICC, adding that there have been no significant changes in economic fundamentals over the past few weeks.

Liang said the yuan’s slip is likely to continue over the next year but ruled out any substantial falls, believing the authorities will control downward risks.

China has managed to maintain the yuan’s stability and strived to establish a transparent and market-oriented exchange rate mechanism, Yi Gang, deputy governor of the People’s Bank of China, the central bank, said in an editorial published on Oct 25 in the People’s Daily, the official newspaper of the Communist Party of China.

“The yuan has stayed stable against a basket of currencies and is less volatile than most reserve currencies and emerging market currencies,” he said.

Yi stressed there is no basis for persistent depreciation, as China’s 6.5 to 7 percent growth will help the currency remain at a reasonable level.

The Chinese economy has shown signs of stabilizing in the first three quarters of the year with an enviable 6.7 percent year-on-year GDP increase as robust government spending and a property boom offset sluggish exports, creating sound conditions for the yuan to hold steady.

Economists predicted China’s growth will remain resilient for the whole of 2016 due to encouraging indicators, including rail freight volume and industrial profits.

“Generally speaking, the economic circumstances are better than last year, driven by investment in infrastructure and real estate,” said Shen Jianguang, chief economist at Mizuho Securities.

The Asian Development Bank upgraded its forecast for full year growth from 6.5 percent to 6.6 percent at the end of September. China’s central bank economist Ma Jun on Oct 25 estimated annual growth of 6.7 percent.

China’s huge trade surplus and forex reserves will also serve as a significant prop for the yuan’s value.

Trade surplus amounted to 2.59 trillion yuan ($400 billion) in the first nine months, and forex reserves, although on a losing streak, stood at $3.17 trillion at the end of September.

The yuan has been officially included in the elite reserve currency basket of the International Monetary Fund, joining the US dollar, the euro, the Japanese yen and the British pound, in its latest step toward becoming a global currency.

Analysts expect the yuan to be more resilient in the future as its inclusion will boost demand from global institutions and facilitate its use in trade settlements.

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