Business / Opinion

Yuan volatility opportunity for convertibility

By Li Xiaotang ( Updated: 2014-06-17 15:43

After depreciating for more than three months in a row, the Chinese currency renminbi, or the yuan, saw its biggest gain against the US dollar for a single week in the past two and a half years upon closing last Friday, sparking market speculations whether the latest round of yuan's depreciation was over.

The yuan closed at 6.2107 against the dollar in China's foreign exchange spot market on June 13, up 0.64 percent over the previous week, the biggest weekly increase since December 2011.

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The appreciation of the yuan can be attributed to the following causes:

First, the Chinese economy showed signs of bottoming out as the Purchasing Managers' Index in China's manufacturing sector rebounded and the country's trade surplus in May set a new high since February 2009, according to official statistics.

In addition, the People's Bank of China recently injected more money into the financial system through measures aimed at stabilizing China's economic growth, including cutting the reserve requirement ratio for targeted banks and increasing loans through the re-lending facility, which significantly dampened the willingness to stimulate the economy through depreciation of the yuan.

Last, from international perspective, the European Central Bank's negative interest rate policy is set to drive international capital to return to emerging economies, especially China.

Owing to the withdrawal of the United States' quantitative easing and the approaching of an interest rate increase cycle, the dollar has kicked off a new round of gain, which will significantly ease the pressure on the yuan to appreciate.

Therefore, the yuan will gradually shift into a scenario intertwined with appreciation and depreciation. Such volatility will gradually become commonplace for the yuan, and China should seize this opportunity to move toward its reform goals for full convertibility of the yuan and set up a market-determined exchange rates mechanism as early as possible.

The author is a certified financial planner and independent commentator. The views do not necessarily reflect those of China Daily.

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