China’s yuan depreciation down to ‘short-term pressure’, says Beijing, economic fundamentals offer future support
- China’s yuan is around 6.9 per cent weaker against the US dollar than it was a year ago, sparking growing capital outflow fears amid a weakening economy
- But the medium- to long-term future of the currency will be ‘supported by solid underlying fundamentals’, said a newspaper affiliated with the central bank
Beijing has attempted to strike a positive note for the fast depreciating yuan, claiming it is as a result of “short-term pressure”, adding that the Chinese currency has solid support from economic fundamentals.
The yuan is around 6.9 per cent weaker against the US dollar than it was a year ago.
The offshore rate has plunged to a nine-month low of 7.34 against the US dollar, while its onshore counterpart also dropped to its lowest level since November at 7.29.
The Chinese yuan will continue to maintain a fundamentally stable position around a reasonable and balanced level
“The recent weakening of the Chinese yuan against the US dollar is primarily due to short-term pressures,” according to an article published on Wednesday by the Financial News, a newspaper affiliated with the People’s Bank of China (PBOC).
It cited unfavourable factors, including interest rate differentials resulting from divergent US-China monetary policies and temporary strengthening of the US dollar amid an aggressive round of rate increases.
However, the outlook for the exchange rate and cross-border capital flows remain relatively stable, the newspaper said.
“Looking at the medium to long term, the Chinese yuan will continue to maintain a fundamentally stable position around a reasonable and balanced level, supported by solid underlying fundamentals,” it added.
Beijing has long claimed that it has a deep toolbox to stabilise the currency, but that it also wants a flexible yuan exchange rate to help absorb external shocks.
At the midyear work conference earlier this month, the central bank vowed to pay close attention to the fluctuation of cross-border funds and strengthen macroprudential management and guidance of expectations.
“[We must] keep the yuan exchange rate basically stable at a reasonable and balanced level,” it said.
Overseas investors, however, slashed their holdings of China’s interbank bonds by 40 billion yuan (US$5.5 billion) to 3.24 trillion yuan (US$444 billion) at the end of July, according to the PBOC.
In a move to anchor market sentiment, the foreign exchange regulator said on Tuesday that foreign direct investment hit the second-highest level in a year in July and that new inflows of portfolio investments were reported.
It also said tightening monetary policies by major global economies are approaching an end, which will alleviate related spillover effects.
The foundation of China’s forex market remains solid
“The foundation of China’s forex market remains solid,” said deputy administrator Wang Chunying.
China’s cabinet, the State Council, has renewed policies to attract foreign investors and facilitate investments, issuing business visas and offering tax incentives for overseas businesses
“[The aim is to] improve the business environment for foreign investors and boost foreign direct investment,” it said.
