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Commentary: RMB devaluation warrants no currency war
While China's newly announced revision of the yuan's central parity rate formation system earned applause from the International Monetary Fund (IMF), some U.S. lawmakers, not surprisingly, began to grumble again about China's currency reform.
Accusations that China is manipulating the Renminbi (RMB) to gain a trade advantage do not hold water, and their worries that "China is waging a currency war" are exaggerated.
On Tuesday, the People's Bank of China (PBOC) announced that daily central parity quotes reported to the China Foreign Exchange Trade System before the market opens should be based on the closing rate of the inter-bank foreign exchange rate market on the previous day, supply and demand in the market, and price movement of major currencies.
Firstly, the decision was made against the background that the RMB's central parity rate has deviated from its actual market rate "by a large extent and for a long duration," which has "undermined the authority and the benchmark status" of the central parity system.
The central bank aims to better reflect market development in the exchange rate between the Chinese yuan against the U.S. dollar, and the yuan's devaluation was a result of reforms intended to make its exchange rate more market-oriented.
The sharp fall in value of the Chinese currency after the announcement is a "one-off" adjustment, which has bridged the previously accumulated differences between the central parity rate and the market rate.
Besides, the exchange rate formation mechanism reform neither simply equals currency devaluation, nor means a devaluation trend of the RMB.
Secondly, China has not devaluated its currency on purpose to benefit its exporters at the expense of overseas competitors. The lower exchange rate is just a byproduct, not a goal.
China's exports have indeed witnessed a slump this year, but this is largely a reflection of sluggish external demand. Fortunately, China has sufficient policy ammunition to boost domestic demand to offset external headwinds.
According to the HSBC, both monetary and fiscal policies are becoming more accommodative and better coordinated, as evidenced by the reports that policy banks will issue more than 1 trillion yuan in financial bonds to support infrastructure investment.
The HSBC forecast that "the combination of monetary and fiscal policy support should help ensure that the economy [is] on a path of cyclical recovery and achieve the growth target of around 7 percent."
Thirdly, a weakening of the currency has resulted from relatively slow real economic growth, and a stable exchange rate needs a steady economy.
As the U.S. economy has gained fresh recovery momentum, it is natural that the U.S. dollar has appreciated.
Meanwhile, China, which is undergoing a "new normal" in its economy that demands shifting its development model to a more balanced and sustainable one, still needs time to stabilize. Thus, it comes as no surprise that the RMB exchange rate will not stabilize until the economy itself is stable.
[Source: Xinhua, Beijing, 12Aug15]
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