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同济大学经济与管理学院经济金融系教授,东南大学管理学院兼职教授,中国青年企业家协会常务理事,人民日报海外版特约评论员。 曾在政府机关和企事业单位工作20余年,担任过政府机关处长、历任四家大型企业集团主要负责人和某上市公司董事、总经理,曾发表经济与管理论文百余篇,出版著作12部。

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small ups and downs expected  

2014-06-17 13:05:11|  分类: 默认分类 |  标签: |举报 |字号 订阅

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Updated: 2014-05-02 07:49

By Shi Jianxun (China Daily Europe)

Solid economic fundamentals mean worries about yuan fluctuations are unfounded

The yuan's exchange rate has witnessed a cumulative 3 percent depreciation in recent months, due to the overlapping influence of the quantitative easing withdrawal by the US Federal Reserve, China's ongoing economic structural adjustment and its economic deceleration.

Against this backdrop, the decision of the People's Bank of China on March 15 to expand the range of the yuan's daily fluctuation against the dollar to 2 percent from 1 percent has further reinforced market expectations for its continuous depreciation. Worries have also grown that if the yuan is on a long-term depreciation trajectory, it will have an undesirable influence on China's economy.

Such worries are unnecessary. The depreciation of a country's currency, especially drastic depreciation, usually follows a continuous imbalance in the country's foreign exchange supply and demand relations, and such an imbalance is caused by the obvious worsening of its economic fundamentals. China's economic fundamentals have not deteriorated, the economic slowdown it is experiencing is the result of the structural adjustments it is undergoing. China's steady foreign trade growth and its basic balance of international payments mean the conditions are not right for a continuous and drastic depreciation of the yuan in the future. And, while the dollar is strengthening, there is little possibility of China maintaining continuous high-speed economic growth momentum and its trade surplus is unlikely to further expand.

The recent depreciation of the yuan can be viewed as a kind of adjustment of its nearly 26-percent rise against the dollar since China launched reform of the yuan's exchange rate regime in 2005. Currently, China's economic conditions for the yuan's supply and demand are basically in a balanced state and there is no factor that may result in either a drastic appreciation or depreciation. Two-way fluctuations can be expected in the future.

Like two sides of a coin, the yuan's continuous devaluation brings China both favorable and unfavorable effects. A weak yuan can help China boost its exports and squeeze some "hot money" from the real estate market, which will help promote the healthy development of the housing market. At the same time, depreciation will change past expectations for the yuan's one-way appreciation and deter the arbitrage activities of speculative international capital that could have a huge impact on China's economic and financial structure.

However, a weaker yuan will also push production costs higher for those industries highly dependent on imports, especially imports of bulk raw materials, sapping their margins. The exchange rate losses resulting from a weaker yuan will also increase for sectors that excessively rely on overseas borrowing or financing. Continuous depreciation of the yuan will also mean higher costs for Chinese on trips abroad or studying overseas.

If the recent depreciation is regarded as the yuan's long-term trend, it would spark the exodus of hot money from China and cause foreign direct investment to drop drastically, followed by the escape of some domestic funds. This would result in shrinking liquidity in the inter-bank market and falling property prices, thus creating shockwaves in the markets for stocks, bonds and other financial products, as well as the funds-intensive housing market.

However, in the context of the current economic situation, the recent depreciation of the yuan is unlikely to become a definite long-term tendency. But its short-term depreciation in the context of the US economy and the dollar gaining strength will possibly turn into a long-term expectation if China's economy continues to slow.

China should try to prevent the formation of long-term market expectations for a weak yuan, because such kind of expectation, once formed, is difficult to reverse. With the change of its foreign trade environment, China's funds outstanding for foreign exchange will surely decrease, which will drain its overflowing "pool of liquidity". That will further aggravate pressures for the yuan's deprecation and worries over China's economy.

China's central bank should strengthen the yuan's fluctuation management and actively measure the "spillover effect" of the US' monetary policy adjustments. It should also keep a close eye on the influences of the yuan's depreciation and possible chain reactions to reasonably guide market expectations. At the same time, it should work to realize regular two-way fluctuation of the yuan through the tools of price and quantity and moderate intervention in its exchange rate market.

The author is director of the Institute of Finance and Economics at the Shanghai-based Tongji University. The views do not necessarily reflect those of China Daily.

(China Daily European Weekly 05/02/2014 page10)

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