Why has the renminbi exchange rate fallen again?
- By Zhang Ming
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E-mail China.org.cn, March 4, 2014
The yuan's depreciation has reflected the central banks' intervention through market means. But judged from the present situation, two more potential issues still await solving.
First, how long will this round of the depreciation of the yuan last? Based on economic data, China's export growth in 2014 may still be robust, pushing the yuan to appreciate. But if the central bank keeps suppressing the market's intrinsic demand, would the yuan's exchange rate burst into a rebound once the PBC's intervention ends?
Second, will the PBC normalize such intervention measures? Even if the yuan maintains a slight appreciation trend against the dollar, will the PBC still, from time to time, cause the yuan to depreciate so as to squeeze the arbitrageurs, and develop the measure into the China's own version of the Tobin tax?
The central bank's new measure is certainly worth supporting, though it is bound to be short-lived. The intervention measures, which the central bank is confident in, are after all risky, since no one can intervene in the market forever.
Also, the cost of intervention is often shown in a suppressed finance market, such as the 20 percent reserve requirement and the actual negative deposit interest, seen in previous years.
This year should be a prime opportunity for the PBC to lower its intervention over the foreign exchange market in China, so that the exchange rate can remain volatile in both directions. The central bank should make the most of the chance, rather than indulge in clever intervention measures.
The author is a researcher with the Research Center for International Finance, the Chinese Academy of Social Sciences.
The article was translated by Chen Boyuan. Its original unabridged version was published in Chinese.
Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.
