Unidirectional fluctuation of the yuan has ended
- By Jiang Wei
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E-mail China.org.cn, August 20, 2014
The economic sentiment index has kept climbing since June, along with the employment rate. Meanwhile, the purchasing managers index (PMI) in July stood at 51.7 percent, rising 0.7 percentage points from June, the biggest rise this year. As of July, the PMI has been rising for five consecutive months, showing expanding production.
The cheerful signs raised expectations about China's annual growth rate, which will be backed up by the dividend from earlier policies. The growing economy further reduces the possibility that the yuan will depreciate.
In July, China's imports and exports volume totaled 2.33 trillion yuan (US$378.86 billion), up by 6.4 percent year on year. To break it down, exports reached 1.31 trillion yuan (US$213.00 billion), up by 14.1 percent and imports totaled 1.02 trillion yuan (US$165.85 billion), down by 2.1 percent. The same period saw China's trade surplus reach 291.9 billion yuan (US$47.46 billion), which was 1.7 times larger than the same period one year earlier. China's trade growth beat all expectations, meaning that the yuan's exchange rate will largely depend on how China's exports will perform in the future.
The July data featured a rapid increase in exports but a decrease in imports, which explains how rising demand in Western markets has influenced China's trade when domestic demand did not expand. Hence, the international market will highly influence China's exports in H2 of the year.
The appreciating yuan attracted vast amount of international capital into China, before boosting China's stock markets. Under these circumstances, Chinese regulators will face rising pressure in hot money control in the second half of the year. Noticeably, the active capital flow will strengthen the yuan's exchange rate.
To sum up, while the central bank is no longer engaging in routine management of exchange rates, and the yuan's exchange rate formation mechanism is being perfected, the yuan will no longer experience unidirectional volatility, but two-way volatility will become the norm.
Although the yuan's exchange rate is affected by many factors, the expectation of strong exports is a sign of the yuan's slight appreciation, a dominant trend in the second half of the year.
The author is a Ph. D student in Nankai University.
The article was translated by Chen Boyuan. Its original version was published in Chinese.
Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.
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