Unidirectional fluctuation of the yuan has ended

By Jiang Wei
0 Comment(s)Print E-mail China.org.cn, August 20, 2014
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The Chinese yuan (RMB) has shown robust appreciation momentum since the beginning of August, rebounding from months of depreciation. The yuan's middle exchange rate against the U.S. dollar rose by 164 basis points from 6.1681 to 6.1517 on Aug. 7.

This new wave of the yuan's appreciation, which has beat market expectations, has caused concern from all parties, who offered various predictions of the yuan's future. The latest rebound of the yuan's exchange rate may forecast an intensifying two-way volatility, besides further slight appreciation of the Chinese currency.

The rebound in the exchange rate is a result of the central bank's gradual withdrawal from constantly intervening in China's foreign exchange market, which also made the two-way volatility of the yuan's exchange rate a possibility.

On two separate occasions in early August, Zhou Xiaochuan, governor of the People's Bank of China (PBC, the central bank), and Ma Jun, the PBC's chief economist, both noted that the central bank is no longer "routinely intervening in foreign exchange rates," and would only intervene when the fluctuation exceeds the limited range or the capital account sees remarkable imbalance, or in rare scenarios including a crisis in the financial market.

Zhou assured that the financial industry will open up further, a trend that will help perfect the yuan's exchange rate mechanism. He added the fluctuation range of the yuan's exchange rate against the dollar will expand to 2 percent, from the current 1 percent.

Apart from policy shift from the central bank, the yuan's rebounding exchange rate has also been influenced by steady growth of macro-economy, robust increase in exports and the massive influx of foreign capital.

Since June, the PBC has enacted a series of subtle stimulus policies, including lowering the bank reserve ratio for certain financial institutions, as part of the central government's effort to ensure growth. China's economy grew 7.5 percent during Q2, a 0.1 percentage point rise than Q1, signaling that economic growth was picking up speed from the slowdown in Q1.

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