Financial Secretary John Tsang Chun-wah wrote in his weekly blog on Sunday that recent fluctuations in global financial markets were a logical response to developments like the People's Bank of China (PBOC) adjusting the median exchange rate mechanism for renminbi (RMB), the rout in the Chinese mainland's stock markets and expectations of the US Federal Reserve raising interest rates soon. He said these developments, undoubtedly, will have a significant impact on capital markets but it would only be temporary.

As Tsang and many analysts have pointed out, the Chinese central bank's decision to devalue the yuan against the US dollar two weeks ago was another step toward making RMB freely convertible and its exchange rate mechanism more market-oriented. The PBOC said clearly the RMB exchange rate will be adjusted upward or downward to better reflect global financial market conditions and the economy in general. That's why the International Monetary Fund (IMF) immediately welcomed the PBOC's move. Investors everywhere should expect the yuan exchange rate to rise and fall according to market demand in future.

There's no question that the yuan's devaluation caused market jitters around the world, but those again were only a temporary reaction triggered by nerves rather than educated deduction. People have no reason to believe the yuan will keep falling against the greenback in the near future or the Chinese economy is collapsing, for that matter. The fact is that some doomsayers have been predicting the demise of China's economy for years if not decades but have yet to see their flights of fancy come true, because their conclusions are mere wishful thinking instead of scientific reasoning.

China is now the world's second-largest economy. It is in the midst of an unprecedented structural transformation from mainly export driven to domestic demand driven, while economic reform continues to work toward greater market orientation. However, this is a long process and is bound to experience twists and turns every now and then. It means Western conventional wisdom does not fully apply when we examine China's economic policies and their results at this point. But, one thing is certain - the Chinese central government is committed to fulfilling its reform plans and the national economy, including finance, will become more and more market-oriented in the years to come.

Currently, however, investors worldwide should be careful for the simple reason that the global economy, in general, and the US economy, in particular, are still recovering from the 2008 financial crisis. When the US Federal Reserve will end its quantitative easing cycle and begin raising interest rates would depend on how well the US economy is doing. It may be quite a while before that happens.

(HK Edition 08/24/2015 page8)