Yuan depreciation is market's response

The yuan weakened beyond 7 per US dollar on Monday for first time since 2008 driven by market forces and escalating Sino-US trade conflicts. But the yuan does not have much room for further depreciation, because the fundamentals of China's economy are good, the yuan's value is basically stable and China's foreign exchange reserves are high.

As such, there is no need to over-interpret the yuan's depreciation. What's important is to find a way to properly deal with China's foreign exchange reserves, although fluctuations in the exchange rate are conducive to hedging the risk of a possible decline in exports and rise in unemployment.

The fact is not that China is unable to keep the yuan exchange rate below 7 against the dollar, but that it doesn't have to do so. Since China is committed to market-oriented reform of the yuan's exchange rate, it should not be so sensitive about whether its currency's value is below or above 7 per dollar. To a large extent, seven has more of a psychological than real meaning in terms of the yuan's value vis-��-vis the dollar. Even if the yuan has weakened beyond 7 per dollar, it doesn't mean a drastic fall in China's economic fundamentals.