Speculating on the yuan's depreciating trend risky

The yuan was trading at 6.4825 against the US dollar at the close of session on Friday, a 804 basis point or 1.26 percent depreciation compared with the past three weeks. In the context of the US Federal Reserve's policy turning hawkish with an increased possibility of a hike in interest rate, this has raised worries about whether the Chinese currency will continue to depreciate.

But such worries are uncalled for. The yuan's recent depreciation is a result of huge inflation in the United States, which led to the Fed adopting an aggressive policy in June, which in turn facilitated a strong rebound of the dollar. The yuan's previous appreciations against the dollar were driven to some extent by market sentiments, so with the rebound of the dollar and stabilizing market sentiments, it is likely that the yuan's exchange rate will undergo certain adjustments.

China's recent macroeconomic and foreign trade data show the yuan's exchange rate is within a reasonable range. China's success in containing the spread of the novel coronavirus and achieving economic recovery, combined with the dividends of deepening reform and further opening-up have helped consolidate the foundation for the yuan's stable exchange rate.

There is no basis for short-term substantial depreciation or appreciation of the yuan's exchange rate. First, China's economy is in a state of steady development and its macroeconomic and monetary policies are expected to maintain continuity, stability and sustainability, with no possibility of abrupt change.

Second, yuan assets are still favored by international investors, reflecting their recognition of China's deepening reform and opening-up. As the second-largest economy in the world, China's promising economic prospects and active efforts to promote a new pattern of high-level opening-up will continue to attract foreign investment in the long term.

Third, with the sustained recovery of the US economy, rising employment figures and increased inflationary pressures, the Fed is expected to moderately rein in excess liquidity. Since the US economy is still recovering, and the pandemic is yet to be effectively contained in many parts of the world, the Fed's slow pace of policy normalization will limit the scope for the dollar's appreciation.

In a nutshell, the yuan's exchange rate is expected to continue and reach a reasonable level, and fluctuations will become normal. This is an inevitable result of its market-oriented reform. As for market players, their biggest risk would be to bet on a one-way trend for the yuan.

ECONOMIC DAILY