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Yuan's devaluation message

Updated: 2014-02-27 07:19
( China Daily)

The unexpected fall of the yuan against the US dollar since mid February has gained far more attention than is justified by its size.

The Chinese currency slid for a seventh day on Wednesday to a six-month low against the greenback, sparking widespread speculation that its long-term strengthening has now reversed.

Given that many other emerging-market currencies are under great pressure from the reversal of capital flows triggered by the US withdrawal from its super loose monetary policy, it would be understandable if the Chinese currency follows suit as its economy slowed.

Yet, the fact that the yuan has so far weakened by only about 1 percent against the US dollar during this round of depreciation should not be taken as compelling evidence that the steady rise of yuan has come to an end.

Although the world's second-largest economy has bid farewell to its double-digit growth, there is no sign of any fundamental change to its global competitiveness that would significantly affect the value of its currency.

Hence the abrupt change in the exchange rate of yuan against the US dollar just after the country registered much-better-than-expected trade growth in January must be telling us something else.

Some people have pointed to the rising number of speculators betting heavily on the continued rise of yuan as a reason why Chinese policymakers need to step into the foreign exchange market.

The negative impact of such short-term capital inflows, especially when accelerated, would make a good reason for the Chinese authorities to make a timely intervention. But that can hardly be a key reason given the country's effective control over capital account.

More likely, the real reason that Chinese policymakers would like to let the currency drop for the moment lies with their growing concern over the country's ballooning foreign exchange reserves, which had soared to $3.82 trillion at the end of 2013.

The rapid accumulation of more than necessary foreign exchange reserves will only make it increasingly difficult to address China's domestic and international imbalance while protecting the value of its forex reserves, the world's largest.

The recent storm in the currency teacup might be sending the message that there will be more actions are in order to better regulate the country's balance of payments to support domestic reform and growth.

(China Daily 02/27/2014 page8)