Experts said that Zhou Xiaochuan's comments on China's exchange rate policies might have contributed to the yuan's appreciation on Monday, Feb. 15. (Photo : REUTERS)
Experts believed that the main factor that led to Monday's substantial gains by the yuan against the dollar may be credited to the comments made by the head of China’s central bank on the need to stabilize the yuan's exchange rate and U.S. Federal Reserve uncertainty on its rate policy, the Global Times reported.
Media reports said that the yuan rose on Monday, Feb. 15, to its strongest level against the U.S. dollar this year. The onshore yuan rate closed at 6.4944 per dollar after reaching 6.5300 against the dollar in early trading. Compared to the previous closing rate on Feb. 5, this represented a rise of more than 1 percent against the dollar, the largest one-day increase since 2005.
On Monday, the People's Bank of China (PBC) set the yuan central parity rate at 6.5118 per dollar, nearly 1 percent higher than on Feb. 5. The central parity rate for daily yuan trading is set by the central bank and allows the the yuan to be traded 2 percent higher or lower than that level.
According to experts, the comments made by Zhou Xiaochuan, governor of the PBC, on China's exchange rate policies might have contributed to the yuan's appreciation on Feb. 15.
The central bank will keep the yuan "basically stable" against a basket of currencies and the dollar, Zhou said in an interview with domestic financial magazine Caixin Weekly.
"Zhou's remarks showed the official attitude toward the yuan," Tan Yaling, head of the China Forex Investment Research Institute, told the Global Times on Monday. "This had a certain impact on today's yuan movement."
Zhou Yu, director of the Research Center of International Finance at the Shanghai Academy of Social Sciences, held a similar view with Tan, adding that the Fed's apparent uncertainty about whether to continue its interest rate hike could also be a major reason which resulted in the U.S. dollar's sluggish performance over the past two weeks.
"If the dollar strengthened against a basket of currencies, the yuan would have to weaken against the dollar so as to maintain the stability of its real effective exchange rate," Zhou told the Global Times.
In addition, Tan noted that the overseas markets, particularly the stock markets, suffered during the seven-day Spring Festival holidays last week, so the risk hedging function of yuan assets may also have contributed to Monday's big gain. She, however, pointed out that the yuan still faces downward pressure.
"First, after the currency's appreciation over the past decade, the yuan needs some technical correction," Tan said. "Second, the government has obviously agreed to let the currency depreciate given the current trade and economic situation. Finally, China's economic slowdown is the fundamental reason behind the currency's slide."
The PBC governor, however, denied that China is intentionally guiding yuan's depreciation to support its exports and boost GDP growth.
"[China's] commodity trade surplus has reached $600 billion and the contribution of net exports to GDP is not low, so there is no motivation to [guide the yuan to] depreciate to expand net exports," Zhou said in the interview posted on the PBC's website.
Zhou said that the stronger dollar, international and domestic events, and short-term market sentiment caused the recent yuan depreciation.
The PBC governor also reiterated the commitment to implement further exchange rate reforms to set up a system based on market forces and one that is measured against a basket of currencies rather than just the dollar, while continuing with a managed rate float.
According to a report sent by UBS Securities Asia to the Global Times, the yuan's exchange rate will still depend largely on the dollar's strength, noting that the PBC will try to keep the yuan stable.
"For the time being, the PBC may be keen to keep the yuan relatively stable not only against the basket of currencies but also against the dollar to avoid amplifying concerns," the report said.
