Chance of RMB devaluation small

Updated: 2011-12-19 16:48


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The optimism of the E.U. summit has quickly dissipated, which pushed the U.S. dollar higher. Near the end of the year, the spot exchange rate of the RMB has hit its lower limit against the U.S. dollar for the 10th straight day.

Analysts said the latest declines in the RMB do not mean it will enter a phase of steady depreciation, and the end may come soon for a recent trend in which the RMB consistently declined in value to its lower limit.

The optimism generated by the E.U. summit agreement was short lived, and the European debt crisis has not eased despite the inter-governmental agreement to strengthen financial discipline. The agreement did little appease ratings agencies, which issued stern warnings about the sovereign ratings for the European Union and euro zone. Moody's said it would re-evaluate all 27 E.U. member states in the first quarter of next year, and Fitch also warned that the E.U. summit failed to give a comprehensive solution to the debt crisis .

With these factors in mind, there was a heightened aversion to risk, and the U.S. dollar rose causing the RMB to depreciate even lower. The RMB’s parity rate against the U.S. dollar was at 6.3359 on Dec. 13, 62 base points lower than that of the previous day. The RMB against the U.S. dollar was at 6.3676 at 3:00 pm and the RMB hit its lower limit against the U.S. dollar in early trading for the 10th straight day.

"The RMB against the U.S. dollar was mostly opening lower in early trading, pulling up to the limit, and closing higher in the spot market in this period," Wan Chao, investment manager of Ping An Asset Management Company, told the reporter.

Bank foreign exchange dealers said there were many technical reasons for the continuous "limit" of the RMB including unstable market confidence, the needs of exchange rate correction, advanced repayment of foreign currency loans by enterprises, "hot money" reflux and so on. Especially in the context of a stronger U.S. dollar, global currencies are devaluation in general, and it is normal change for RMB periodically devaluation.

According to analysts, the narrowing gap between parity exchange rate and the spot market — the RMB against the U.S. dollar — would end the ongoing trend of devaluing to the lower limit and there is little chance of violent RMB devaluation. Analysts expect the RMB appreciation will continue into the first half of 2012 and then enter into the wide two-way fluctuations.