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NovSince April this year, the yuan against the US dollar has presented tendency-based depreciation, totaling about 11% by the end of October. After exceeding a series of so-called integer points, such as 6.5 and 6.6, the exchange rate of the yuan against the US dollar has already approached 7, which has sparked attention from all walks of life. As a matter of fact, the so-called integer points used to be simply consecutive numbers, but have now become magic signs through overemphasis of media, which seems that the exchange rate at the edge of or below these numbers will be totally different.
As the US dollar takes a dominant position in the global monetary system, and amid the US dollar normalization and the deterioration of the global trading system, the devaluation of the currencies of various countries against the US dollar is a thing that couldn’t be more sure. For either currencies of developed countries or those of developing countries, the only difference is the depreciation range.
This round of the yuan depreciation against the US dollar started in April this year, and taking that as the starting point, let’s look at how much the currencies of various countries against the US dollar have depreciated respectively. First of all, in developed economies, the Japanese yen, the euro and the pound have respectively depreciated by 5%, 6% and 7% against the US dollar. In emerging economies, the South Korean won has depreciated by 6% by the end of October, showing a slight depreciation. RMB, the Brazilian real and the Indian rupee have respectively depreciated by 10%, 11% and 12% against the US dollar.
China’s yuan has joined the Special Drawing Rights (SDR) currency basket and become a reserve currency of some countries, but as a currency of a developing country, RMB hasn’t possessed the properties as a safe-haven asset yet. When the international financial market fluctuates, a slight depreciation is quite normal. Moreover, by now, after encountering more vigorous trade frictions than those of other countries, China has witnessed the yuan depreciation still within a reasonable range compared with developed and emerging market countries. Not to mention that the yuan is much more stable than currencies of “ñ vulnerable countries” in the international financial market.
The RMB depreciation can benefit China’s commodity exports, but we should see that the Chinese government has declared several times that it would not handle international trade frictions through the currency devaluation policy. Meanwhile, China is also a major commodity importer in the world, and foreign direct investment plays an important role in its economic development. The basic stability of RMB exchange rate can benefit Chinese economy in the long run. Therefore, the change of RMB exchange rate recently is a normal response to the change of international economic situation, rather than the outcome of artificial manipulation.
Since the yuan depreciation against the US dollar has already taken place, investors or consumers are actually more concerned with the future tendency of the RMB exchange rate as well as its influence on individual interests. The short-term fluctuations of exchanges rate are affected by many factors, including economic cycle, macro-policy, international environment and even market sentiment. But the long-term variation trend of exchange rate depends on the difference in technological advancements and the increase speed of labor productivity hidden behind different economic growth rates of the two countries. The country with faster technological advancements and increase of labor productivity will face a tendency of long-term currency appreciation.
The RMB exchange rate is actually facing the pressure and uncertainties of short-term depreciation. On one hand, the China-US trade frictions haven’t been solved yet. The Trump administration has announced plans to continue to increase tariffs on Chinese goods in 2019, and impose sanctions on Iran for exporting oil and on Chinese enterprises with the excuse of national security and competitiveness, which all affected the short-term tendency of Chinese macro-economy and investors’ confidence in the foreign exchange market in the future. Through the experience of trade frictions between the US and Japan for 30 years from 1960s to 1990s, the deterioration of China’s foreign trade environment will be a long-term phenomenon.
On the other hand, the US Federal Reserve’s interest rate hikes according to its planned pace will be a large probability event. The US monetary policy has a deep-rooted tradition of isolationism, and even though its unemployment rate has declined a historic low of 3.7%, the US government will not adjust its own policy owing to the conflicts between the President and the Federal Reserve as well as the possibility of causing instability for the global economy.
The Chinese government and enterprises have already had an all-around understanding of the change of the external environment. The Party and the government are also actively adjusting related policies and helping enterprises cope with the unfavorable situation. The just-concluded conference of the Political Bureau of the CPC Central Committee fully considered practical problems facing China, such as growing economic downward pressure, a lot of difficulties facing some enterprises during operation, exposure of accumulated risks and hidden dangers, etc., and adjusted related policies correspondingly. Based on six tasks for economic stability, new deployments and arrangements have also been made to promote the shared development of economy with different types of ownership and further utilize foreign capital effectively.
This indicates that amid the growing uncertainties of the external environment, the Chinese government has already set about adjusting its economic policies, so as to prevent various overlapped policy effects from causing greater impacts on the economy. In addition to the adjustment of macro-policies, the People’s Bank of China (PBOC) is also taking proactive measures to stabilize the RMB exchange rate. On November 7, the PBOC will issue RMB 20 billion in offshore bills through the Hong Kong Monetary Authority, which will play an active role in promoting the development of offshore RMB market and stabilizing the offshore RMB exchange rate.
In the long run, China's domestic factors still play a decisive role in determining the long-term variation trend of RMB exchange rate and its economic development in the future. China’s economy will still maintain steady and robust growth momentum in the long run only if it unswervingly consolidates and develops the public economy and unswervingly encourages, supports and guides the development of the non-public economy, achieves the shared development of economy with different types of ownership and encourages technological innovation. The recent variation of RMB exchange rate has not been caused by systematic crisis of the Chinese financial market nor by the reversal of the long-term growth trend of Chinese economy, but is quite normal amid the change of the international economic environment. Investors and consumers can keep a rational and strict eye on the current change of RMB exchange rate, rather than excessively emphasizing and interpreting it.
(The author is research fellow of the National Academy of Development and Strategy, Renmin University of China as well as professor of the School of Economics)
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