The Chinese renminbi is unlikely to see drastic depreciation in 2015 despite fluctuations, thanks to the country’s solid economic fundamentals and a stable policy.
Expectation of a lukewarm domestic economy and a continuously rising US dollar so far this year have created concern that the renminbi, also known as yuan, is set to depreciate sharply this year.
The concerns did not develop out of thin air. The central parity rate of the renminbi has been declining for four days in a row since the new year’s trading started.
This follows a 2.5 percent depreciation in the spot exchange rate of yuan against the US dollars in 2014, the first annual decline since 2005 when China launched the reform of yuan’s currency exchange rate mechanism.
Other major currencies, such as Japanese yen, Russian rouble and euro, have also continued decline, exerting more pressure on the renminbi.
However, analysts said the wild fluctuation of yuan exchange rates during the final two months of 2014 did not represent a drastic change in China’s currency exchange rate policy, and a sharp depreciation of renminbi in the new year is out of the question.
It remains the country’s policy to keep the exchange rate of renminbi stable at the “appropriate equilibrium level” and expand the floating range of rates, Liu Dongliang, senior analyst of China Merchants Bank, told Xinhua.
China’s strong current account surplus will help support the currency, analysts said.
China recorded a current account surplus of $152.7 billion in the first three quarters of 2014, representing 2.2 percent of the GDP. A CICC report predicts the ratio will rise further to 3 percent this year as the effect of lower commodity prices passes through the economy.
In particular, the latest bouts of slumping oil prices, sparked by a supply glut and sluggish demand, is expected to remain, knocking billions off China’s import bill this year.
According to J P Morgan’s chief China economist Zhu Haibin, every $10 reduction in oil prices will drive up China’s current account surplus/GDP ratio by around 0.3 percent. The bank predicts the ratio to rise to 3.6 percent in 2015.
Secondly, China’s central bank has no desire to and would not allow yuan to depreciate continuously, said Bian Quanshui, an analyst at China International Capital Corp. (CICC), the country’s leading investment bank.
In the final two months of 2014, although the spot exchange rates of yuan went down, its central parity rates were rising, indicating the central bank’s desire to keep yuan’s exchange rates stable, said Bian.
Echoing Bian, Liu said, “we don’t think the decision makers are well prepared for continuous depreciation of the renminbi.”
An expanding trade surplus also means that the conditions for a large-scale depreciation of yuan are not yet ripe, not least because the Chinese economy’s dependency on exports is declining, Liu added.
Boosting export policies such as letting yuan depreciate would result in more international trade friction, which is not desirable, Bian said.
Last but not the least, the Chinese economy needs a stable capital market environment at a time when a stronger-than-expected dollar has caused capital outflow.
The continued depreciation of the renminbi may trigger capital outflows from China that will destabilize the financial system.
“We think the probability of the yuan depreciating significantly against the US dollar is low as the government would like to maintain a stable domestic capital market, prevent massive capital outflows and promote internationalization of the renminbi,” noted Lu Ting, chief China economist with Bank of America Merrill Lynch.
As to where the exchange rates of renminbi might go in 2015, Xie Yaxuan, leading researcher for China Merchants Securities, said the exchange rate for yuan has reached an equilibrium, which means it will only move within a certain range.
Xie expects yuan’s exchange rates against the US dollars to move by a margin of 2.5 percent with 6.16 as the median figure.
According to CICC forecast, the central parity rate of the renminbi would reach 6.11 at the highest and its spot exchange rate is expected to rise to 6.2.
Source : Channel News Asia | January 12, 2015