While the Chinese yuan’s exchange rate vs. US dollar has depreciated about 13% from a high of 6.05 yuan at the beginning of 2014, a senior central bank official recently rebuffed the idea that the yuan may experience big fluctuations amid an overwhelming expectation of its further depreciation.
“We don’t think China is experiencing serious international payments imbalance, so (we) don’t think that the yuan should see any major movements,” Zhu Juan, director of the international division of the People’s Bank of China (PBOC), said in an exclusive interview with China Securities Journal published on Thursday.
Zhu explained that the current account would affect yuan’s exchange rate in more noticeable ways than capital account. China’s current accounts surplus remains big and the international payment will be basically balanced in the mid to long term run, helping to keep the yuan stable, she said.
China’s current account surplus was 1.395 trillion yuan as of the end of 2016, down from 2.059 trillion yuan in the previous year, according to data from the State Administration of Foreign Exchange.
Meanwhile, the flow of the capital account is mainly affected by expectations on exchange rate and speculations as well, Zhu said. But she added that with the yuan’s exchange rate nearing a balanced point, rational expectations will take the leading role.
China’s foreign exchange reserves slumped to $2.998 trillion yuan by January 2017, falling below the $3 trillion level for the first time in six years, which has boosted expectations for the yuan’s further depreciation. In response, China’s government has rolled out a series of measures in a bid to discourage the yuan from flowing out.
“China’s overseas direct investment started only around 10 years ago. In the past, Chinese companies lacked the knowledge and experience required to ‘going global’. Now with more investment opportunities and a better understanding of foreign laws, the investment enthusiasm has gone up. (Some companies) may just follow other’s steps. And (such enthusiasm) would cool down a normal level,” said Zhu.
As to the questions of big uncertainties over US policies and dollar’s big fluctuations after Trump took power, Zhu said the expectations on yuan’s further depreciation have weakened locally and globally, so are the expectations on Chinese capital outflow.
But investors betting on yuan’s depreciation don’t want to lose, and they will enforce their views on the market, Zhu said, adding the views are misleading.