Will RMB exchange rate continue to depreciate?
- By Yi Xianrong
0 Comment(s)
Print
E-mail China.org.cn, August 17, 2015
So, the release of Opinions on Promoting the Steady Growth of Imports and Exports soon raised market expectations of RMB depreciation. That is, the market anticipated that the RMB faced a possibility of a bigger depreciation if its exchange-rate floating range further expands, because this can both promote China's exports and help change the tendency of a stronger RMB against the US dollar. But, in the present market situation, currency depreciation can have a limited role in increasing China's exports. For example, since 2014, the RMB has been allowed to depreciate slightly. But export growth did not improve as a result, and capital outflow occurred instead. The Chinese government will possibly focus on increasing the exchange-rate flexibility in its current market-oriented exchange rate reform.
What's more, the present decision on the exchange rate should also take into account the process of RMB internationalization. For instance, China is striving to join the IMF special drawing rights (SDR) basket and needs to maintain a steady exchange rate. In addition, China's external debt is as high as $1.6 trillion dollars, with short-term debt accounting for 70%. A substantial RMB depreciation could see a large amount of RMB converted into US dollars to get ready to pay debts, which will be bad for domestic financial stability. Meanwhile, a sharp RMB depreciation will also stimulate the outflow of Chinese capital. These are the factors to be considered in RMB depreciation.
However, because of the recent turmoil in China's A-Share market, a still very large downward pressure of China's economic growth and the big change in the international financial market situation, domestic enterprises and residents already had an RMB-depreciation expectation to a certain degree in the first half of the year. Judging from the RMB movement this year, although the exchange rate against the US dollar basically remained stable and appreciated slightly, domestic residents were much more willing to hold US dollars. China's foreign exchange reserve was cut down by over $149.2 billion in the first half of the year. Although the reduction of foreign reserve could be caused by many factors, it is related to the fact that domestic residents expected RMB depreciation and held more US dollars. In case of further expansion of the exchange rate flexibility, a slight depreciation of the RMB will increase domestic residents' expectation of RMB depreciation. Under this circumstance, there will be a downward risk of RMB depreciation.
With the changes in domestic and global situations both at home and abroad, any further expansion of the RMB exchange rate flexibility will increase the possibility of RMB depreciation. Although the degree of RMB exchange-rate depreciation could be determined by how the Chinese government weighs the advantages and disadvantages of RMB exchange-rate movement, market forces play a more important role. Investors have to pay close attention to this.
The author is a columnist with China.org.cn. For more information please visit: http://china.org.cn/opinion/yixianrong.htm
See more at http://www.chinausfocus.com/finance-economy/will-rmb-exchange-rate-continue-to-depreciate-in-the-second-half-of-the-year/#sthash.w1BQ0xUc.dpuf
Opinion articles reflect the views of their authors only, and not necessarily those of China.org.cn.
