China plays down concerns over yuan depreciation, dip in forex

By: | Published: March 10, 2017 3:37 PM

Fending off US President Donald Trump's allegation of currency manipulation, China today said the yuan will "automatically" stabilise this year and asked people not to overreact to the huge dip in its forex reserves.

The Chinese currency weakened about 6.6 per cent against the dollar last year, but remained relatively stable against several other currencies. (Reuters)

Fending off US President Donald Trump’s allegation of currency manipulation, China today said the yuan will “automatically” stabilise this year and asked people not to overreact to the huge dip in its forex reserves. The unpredictability in the foreign exchange market is due to uncertainties at home and abroad, Central Bank Governor Zhou Xiaochuan said, adding that fluctuations will be normal. Speaking to reporters on the sidelines of the annual parliament session, Zhou attributed the yuan’s fluctuations in the second half of last year to outbound investment and forex spending, which, he said, were bigger than past years. Surge in the American dollar’s value following “unexpected” changes in the wake of US presidential election was also partly to blame, he added.

The Chinese currency weakened about 6.6 per cent against the dollar last year, but remained relatively stable against several other currencies.

Trump has made tough statements against China before and after his election, calling Beijing a “currency manipulator” and even threatened to impose tariffs on Chinese-made goods.

In his work report to the National People’s Congress (NPC) on March 5, Premier Li Keqiang hinted at liberalising the yuan against the dollar, signalling willingness to alter course on exchange rates.

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For the first time in an annual government report, China included the requirement to ensure the stable global status of the yuan as one of its major tasks, dropping the line “keeping a stable yuan at a reasonable and balanced level” which was included in the previous three reports, media reports said.

“The renminbi exchange rate will be further liberalised, and the currency’s stable position in the global monetary system will be maintained,” Li said.

The new wording may indicate that Beijing will be more tolerant of the yuan exchange rate moves against the dollar and gradually reduce its intervention in the foreign exchange market this year, Hong-Kong based South China Most Post reported on March 6.

It quoted analysts as saying that the Chinese currency is losing its appeal for investors, even though it had obtained a nominal reserve currency status from the International Monetary Fund, thanks to the Chinese government’s tightened capital account controls and the prospects of weakening against the US dollar, analysts said.

In his press conference today, Zhou also played down concerns over China’s world’s largest forex reserves declining saying that there should not overreaction in this regard.

The dropping trend in China’s foreign exchange reserve is a normal phenomenon, he said adding that, “China does not want that much forex reserve.”

He said the forex reserve had seen fast expansion since 2002, which China deems to be unnecessary.

In the meantime, China sees no need in its policymaking to overreact to the large stockpile, Zhou said.

Since the global financial crisis, capital flow from developed countries implementing monetary easing policies to emerging markets had surged significantly, Zhou said.

The capital influx lacks stability and may flow back with the recovery of those developed economies, he added.

China still holds the largest forex reserve stockpile in the world, much higher than the runner-up, the governor said.

China’s outstanding forex reserve stood at a little more than USD 3 trillion by the end of last month, down from near USD 4 trillion in 2014, according to official data.

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