财新传媒
位置:博客 > 吴金铎 > Yuan exchange rate remains flexible to offset shocks

Yuan exchange rate remains flexible to offset shocks

On Monday, the offshore yuan (US dollar-yuan spot exchange rate) dropped below 7. Soon afterwards, the onshore yuan (US dollar-yuan spot exchange rate) fell below 7. Subsequently, the central bank lowered the intermediate price of the yuan against the US dollar by 229 points, thereupon the yuan to US Dollar intermediate price was quoted at 6.9225.

One reason for the latest devaluation of the yuan is the deadlock in the China-US trade negotiations following US President Donald Trump's decision to continue imposing tariffs on the rest of the $300 billion of imports from China. The China-US negotiations have a direct impact on the exchange rate of the yuan. On May 5, President Trump announced an increase in tariff rates on $200 billion of Chinese goods from 10 percent to 25 percent, and threatened to impose tariffs on another $300 billion. On May 10, the 25 percent tariff rate of $200 billion on commodities imported from China came into effect. Meanwhile, the US government officially launched a tariff procedure on $300 billion of Chinese goods on May 13. As a result, the onshore yuan depreciated from 6.7 at the beginning of May to 6.9 at the end of May. At the G20 meeting in Osaka, the leaders of China and the US met to try to nail down the trade negotiations. President Trump orally declared that he would no longer impose new tariffs on the final $300 billion. What is interesting is that later, at the end of July, after the US Trade Representatives concluded negotiations in China, President Trump announced on Twitter that he would continue to impose tariffs at 10 percent on China's imports of $300 billion. Since then, the US dollar against the offshore yuan has risen from 6.7 at the beginning of the year to around 7.1 on Monday, while the onshore yuan has risen from 6.6896 at the beginning of the year to almost 7.05 currently.

Secondly, benefiting from the strong economic fundamentals of the US and its robust labor market, the US dollar index has strengthened from the beginning of this year. It rose from a low point of 95.5 at the beginning of the year to a high of 98.5342 on July 31. US GDP grew at 3.1 percent during the first quarter, and was still better than expected despite a decline in the second quarter (2.1 percent). Second, the first quarter GDP of the US is not only higher than the same period within almost 3 years' history, but also has an outstanding record compared with other developed countries. In the first quarter of 2019, the US economy grew by 3.1 percent, which was higher than Japan and the eurozone that grew only 1 percent. At the same time, non-farm employment and wages in the US have also functioned well over the last two years. Economic and labor markets as well as moderate inflation boost the US dollar index. These trends increase the pressure on the yuan exchange rate.

Finally, China's economy is under downward pressure. Here and now, the Chinese economy faces the pressure of economic transformation, the key points of speed change, new and old kinetic energy conversion, as well as the adjustment of economic structures, but this downward pressure is quite normal. Nevertheless, in the short run, the trade war has affected domestic manufacturing investment and employment. Meanwhile, the regulation of real estate is unprecedented, which strictly implements "no speculation in housing." Thus, the tightening of real estate financing has brought pressure to real estate investment. It should be pointed out that the recent riots in Hong Kong deteriorated expectations about Hong Kong's economic fundamentals and exchange rate depreciation.

As the yuan breaks through the "7" threshold, the market will gradually adjust its bearing benchmark for the yuan, and digest risks gradually. Devaluation helps to release the low volatility risk of exchange rate that lasts for a long time, and also helps to set free downward economic pressure and asset bubble risks. At the price of a short term shock on market sentiment. Anyway, a flexible yuan exchange rate and appropriate devaluation will help to maintain steady growth and employment, offset the impact of trade wars and tariff increases on enterprises.

In a timely manner, the People's Bank of China replied to some questions concerning the exchange rate of the yuan on Monday. They mention that from the macro level, China's current economic fundamentals are sound, the economic restructuring has achieved positive results, growth flexibility is strong, the macro-leverage ratio remains basically stable, and the financial situation is sound. So, the yuan-devaluation risks can be controlled under conditions that the balance of payments is stable, cross-border capital flows are generally balanced, and foreign exchange reserves are sufficient, providing fundamental support for the yuan exchange rate.

In brief, the short-run fluctuation of the yuan exchange rate depends on the US dollar index and trade negotiations, which are the core factors affecting exchange rate in the short term. Secondly, the medium-term factor of the yuan concerns the attitude of the central bank to the yuan exchange rate regulation. How the central bank uses the intermediate target of exchange rate price to achieve the ultimate goal depends on whether the exchange rate weight of the US dollar to the yuan is reliant on domestic economic fundamentals or on the progress of China-US trade negotiations. In the long-term, the trend that underpins the yuan is China's economic and financial fundamentals, which are stable and sound compared most with developed countries and developing countries.

本文刊于环球时报英文版(Global Times)“INSIDER'S EYE”栏目, 2019年8月5日



推荐 55