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News Analysis: Declining Yuan Is Normal Market Response

iconDec 7, 2011 09:05
Source:SMM
The steep decline of the Chinese yuan during the past five trading days is market's normal response to China's falling trade surplus.

BEIJING, Dec. 7 -- The steep decline of the Chinese yuan during the past five trading days is market's normal response to China's falling trade surplus, analysts said, and predicted the yuan will stay balanced in value over the long-run.

The yuan fell to the low end of its daily trading against the U.S. dollar for the fifth consecutive day. During Tuesday's session, its central parity rate against the dollar hit 6.3651, forming a sharp contrast with a persistent strengthening before last Wednesday.

A narrowing trade surplus spurred this round of weakening, said Qu Hongbin, chief economist with HSBC China.

Customs figures showed the trade surplus of the world's largest exporter dropped 36 percent in October year-on-year, taking up a much smaller share of the GDP over past years.

The impetus behind a stronger yuan has been paired off, Qu said.

According to Zhang Monan, a researcher with the State Information Center, too much worry about a weaker yuan is unnecessary, as a moderate flow of the yuan's value reflects the market's sense that the Chinese economy is heading for a more balanced structure.

The current account surplus accounted for 2.8 percent of GDP in the middle of this year, much lower than the 10 percent before the 2008 global financial crisis. It also stood below the 4 percent global averaged standard.

A report issued by the central bank's financial research center last month said the yuan had risen against the dollar by 30.2 percent since July 2005, when China started to reform its currency mechanism.

But that has not stopped Western economies from complaining that the Chinese government artificially kept the yuan weak to gain unfair trade advantages.

The yuan's weakening trend shows it is approaching equilibrium value with more flexibility, said Zhang Bin, a researcher with the Chinese Academy of Social Sciences.

"In addition to domestic reasons, we cannot rule out the possibility that a more pessimistic view about China's economic outlook prompted investors to dump yuan," Zhang Monan said.

With the eurozone's sovereign debt crisis far from ending, investors turned to the U.S. dollar to avert risks, as many currencies have weakened against the dollar, dealers with the Bank of China said.

The U.S. dollar index has moved to 80 from 74 since the middle of the year.

The yuan's drastic weakening, though rare, will not affect China's economic growth significantly, analysts said.

A weakening yuan would prompt speculative flow out of China, which would help bust domestic asset price bubbles, said Guo Tianyong, a professor with the the Central University of Finance and Economics.

Yu Yongding, a former member of the Monetary Policy Committee of China's central bank, wrote in a recently published article that a weaker yuan will reduce the central bank's pressure to handle its accumulated foreign exchange reserves.

 

RMB exchange rate; trade surplus;

For queries, please contact Michael Jiang at michaeljiang@smm.cn

For more information on how to access our research reports, please email service.en@smm.cn

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