Small ups and downs expected

China's solid economic fundamentals mean worries about a large rise or fall in the value of the yuan are unfounded

The yuan's exchange rate has witnessed an accumulated 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 China's central bank 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 so 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 economic benefits. 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.