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  • Nov 29, 2014
  • Updated: 12:09pm

Yuan

The Chinese yuan, also known as the renminbi, is already convertible under the current account - the broadest measure of trade in goods and services. However, the capital account, which covers portfolio investment and borrowing, is still closely managed by Beijing because of worries about abrupt capital flows.

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Yuan still rising based on real effective exchange rate, ministry says

Ministry official says recent fluctuations are normal in the face of exchange rate reform

PUBLISHED : Wednesday, 19 March, 2014, 1:26am
UPDATED : Wednesday, 19 March, 2014, 5:10am

Despite the yuan's depreciation against the US dollar in recent weeks, its real effective exchange rate - more closely linked to the trade situation - remained on the rise, Commerce Ministry spokesman Shen Danyang said.

The yuan's real effective exchange rate, compiled by the Bank for International Settlements, had gained 2.03 per cent in January, Shen said yesterday after being asked whether the central government had weakened the currency to aid exports.

A currency's real effective exchange rate is used to measure international price and cost competitiveness, as adjusted for the effects of inflation.

The yuan's onshore spot rate against the dollar has weakened more than 2 per cent this year after rising 2.9 per cent last year.

On Monday, the People's Bank of China doubled the yuan's daily trading band, allowing the exchange rate to rise or fall by up to 2 per cent from a daily midpoint.

Some observers have speculated that the authorities weakened the yuan to boost export competitiveness. Exports fell 1.6 per cent year on year in the first two months of this year, dropping 18.1 per cent last month in the steepest fall since the global financial crisis after jumping 10.6 per cent in January.

However, Shen said recent fluctuations in the yuan were normal when compared with the currencies of some emerging economies. "One should put the yuan's depreciation against the backdrop of the major exchange rate reform, viewing it with a more rational approach," he said.

Shen also said the mainland lured US$19.3 billion worth of foreign direct investment in the first two months combined, up 10.4 per cent from a year earlier.

The mainland releases January and February economic data together in order to eliminate distortions caused by the timing of the Lunar New Year holiday.

Shen said outward investment by non-financial institutions fell 37.2 per cent in the two months of the year to US$11.5 billion. The sharp decline was mainly due to a high comparison base in February last year, he said, when CNOOC closed its US$14.8 billion takeover of Canadian oil and gas company Nexen.

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One important reason contributing to the rise in the yuan’s real effective exchange rate is the relatively quick rise in Chinese workers’ real wage rates relative to their increase in productivity in recent years (perhaps in the name of increasing the welfare of those workers and balancing the economy toward more domestic consumption).
In recent years, I don’t think the overall increase in productivity of the Chinese workers (especially those rural migrant workers) has catched up with the corresponding increase in their real wage rates (through the increase in the minimum wages).
This means that the yuan’s nominal exchange rate against the US dollar may have to fall by a (much) greater extent than most people originally think, to reduce its possible overvaluation, restore (or further increase) the country’s export competitiveness, and help sustain China’s relatively high growth rate.

 
 
 
 
 

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