Business / Economy

No basis for renminbi to devaluate over long term

(Xinhua) Updated: 2016-01-26 16:07

The truth is that China is now in the process of moving towards an exchange rate formation mechanism with more reference to a basket of currencies. "This means that the value of the renminbi will be kept basically stable against the whole basket," Ma Jun, chief economist of the People's Bank of China's research bureau, said in a recent interview.

China will guide the market to form a yuan/dollar rate, so as to help stabilize the yuan's value against the currency basket.

At the current stage, the yuan's exchange rate is not pegged to the US dollar nor is it allowed to float in an unchecked way. China will introduce a mechanism to properly limit daily yuan/dollar rate fluctuation, Ma said.

There are signs the short selling of the yuan has recently declined, just as predicted.

Chinese authorities have also made clear that the exchange rate regime will continue to be based on market supply and demand and with reference to a basket of currencies.

Tommy Xie, an economist with Singapore-based OCBC Bank, said that the direction of the renminbi exchange rate formation mechanism reform is clear and that the central bank of China "has been more predictable rather than unpredictable."

The change of the yuan exchange rate formation mechanism is part of the market-based financial reforms China is pushing through, and it is not easy to push through such reforms. In this context, it is understandable to have short-term fluctuations.

Now it is a managed float mechanism but it is increasingly based on the market, said Zhu Min, deputy managing director of the International Monetary Fund.

Last but not the least, it is important to bear in mind that China can defend its currency against speculators, whose banal trick is to spread rumors and repeat their so-called predictions of a "hard landing" when the market sentiment is gloomy.

In one word, it is fair to say that the spillover effects of the Chinese market fluctuation and potential risks have been exaggerated, and the fundamental reason for the recent global market jitters is that global growth have not recovered to a level that can support monetary tightening.

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