In an unusual commentary Wednesday, Xinhua, China’s state news agency, said the yuan’s continued depreciation against the US dollar since August, was not something to be worried about because “a multitude of factors underpin the Chinese currency in the medium and long term.”
In August, the People’s Bank of China changed the foreign exchange mechanism to make the rate more market-based. This caused the onshore yuan (CNY), which is traded in the Chinese mainland, to fall 4.05% against the US dollar in 2015.
However during the first two trading days of 2016, the offshore yuan (CNH), which is traded in Hong Kong, has consistently gone down, losing as much as 1.3% at one point and putting pressure on the onshore yuan to sink lower.
On Wednesday, the offshore yuan sank to five-year low, its lowest level since the 2010 opening of its offshore market and the gap between it and its mainland counterpart widened sharply reflecting growing expectations of further weakness in the currency amid an economic slowdown and a slump in stock markets, reported CNBC.com
The offshore yuan fell to 6.6915 against the US dollar, the lowest rate of exchange since at least the last quarter of 2010 and a 2.1% discount to the onshore yuan’s 6.5506 level, said CNBC.
Markets generally expect the onshore yuan to continue depreciating against the dollar on the back of sluggish growth prospects, accelerating capital outflows and demand for overseas assets.
Xinhua said short-term volatility of the yuan is understandable as “hot money” makes an exit out of China due to its slowing economy. However, there is no risk for the yuan to see substantial depreciation in the long term.
China’s mammoth foreign exchange reserve (3.4 trillion US dollars), sound economic fundamentals, commendable growth in labor productivity and determination to carry out necessary reforms to unlock vitality, will underpin the currency, said Xinhua.
It also said the continued weakness of global commodity prices would help the currency. China, which is the world’s biggest commodity consumer, would see costs drop and boost its current account surplus, offsetting capital outflows and the depletion of its foreign exchange reserve.
Xinhua said despite the August depreciation, the authorities have no intention to manipulate any drastic depreciation and authorities wouldn’t want or tolerate substantial declines in the yuan either. A typical goal is to keep the currency “basically stable.”