Appreciate the yuan depreciation

Updated: 2014-04-28 06:35

By Xu Qiyuan (China Daily)

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However, the depreciation of the yuan is an important change since the exchange rate reform of 2005. Some analysts believe the central bank pulled the trigger. Although it is controversial, it is undeniable that unilateral yuan appreciation is expected to smooth into a two-way volatility change over the years.

For the central bank, its monetary policy independence will garner more space. In this case, in order to maintain the stability of the yuan against the dollar (1 percent in the volatility range), it needs to intervene more actively in the foreign exchange market.

Appreciate the yuan depreciation
Yuan exchange rate's floating range widened  
Appreciate the yuan depreciation
Specifically, it should release more yuan and absorb more dollars in the foreign exchange market. Although the central bank has been carrying out effective hedging operations, its costs are also rising rapidly. After further liberalization of yuan exchange rate, the monetary policy can be relaxed further.

As for foreign trade enterprises, the exchange rate risks will not necessarily increase in the long term. The reason is simple: because 70 percent of China's exports cater to economies outside the United States. In the past, in order to maintain the stability of the yuan against the US dollar, there was always a compromise on the yuan's stability vis-a-vis the euro, Japanese yen, South Korean won and other currencies. In the next few years, the quantitative easing in the US will further weaken the yuan's dependence on the dollar and help stabilize the yuan's effective exchange rate.

In the international financial markets the yuan will have several new opportunities. Countries that have close economic and trade relations with China will soon take into consideration the yuan fluctuations in their exchange rate formulation mechanism.

The currency appreciation will also promote the offshore, onshore yuan exchange rate forward market, and the development of derivatives markets.

The author is secretary-general of the Center for International Financial Research under the Institute of World Economics and Politics at the Chinese Academy of Social Sciences. The views do not necessarily reflect those of China Daily.

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