The onshore yuan exchange rate closed at 6.4378 to the dollar Thursday, falling for the fifth day in a row, and the central bank cut the central parity rate on Thursday to 6.4236, the lowest point since August 2011. This prompted some market analysts to suggest that China's central bank has developed greater tolerance for fluctuations in the exchange rate.
At present, the yuan rate is under a managed float. Following efforts to marketize the exchange rate, such as allowing a broader trading range and improving the mechanism for fixing the central parity rate, it is understandable that some people have been unnerved by the weakening in the rate over the past few trading days. But we should note that the yuan's internationalization - which involves loosened controls over the rate - may lead to greater and more frequent fluctuations.
The depreciation in the past few days shouldn't be taken as a sign that the yuan will continue on a downward trend. Wang Yungui, a senior official at the State Administration of Foreign Exchange, pointed out that China's forex settlement deficit narrowed to $20 billion in October from $110 billion in September, indicating that the fundamentals of the economy are still solid, and that the yuan will not depreciate on a sustained basis.
Regarding the ups and downs of the exchange rate, as long as they are within a reasonable range, market participants shouldn't worry too much, as such movements are part of the trend toward deepened internationalization and marketization, although adequate forward-looking preparations from the authorities are necessary.
Meanwhile, some have voiced enthusiasm for the recent dip in the exchange rate, claiming that a weaker yuan will boost China's exports, something of particular importance given that exports have declined for five consecutive months.
But we should note that China is undergoing a process of industrial and structural upgrading, and its trade structure is also changing. Unlike in the past when China depended heavily on exports, the country is now focusing on exploring domestic demand and overseas economies are also being drawn to the huge domestic market. In this regard, China is shifting from being the world's factory to offering a promising and growing market.
Facing the slack global economic environment and domestic slowdown, a greater focus on supply-side reform has been proposed by President Xi Jinping. In the future, more market-based strategies will be applied, including more flexible fiscal and taxation policies, greater support for enterprises, and less administrative processes to ensure a more fair and competitive environment. But we should not expect economic breakthroughs overnight as it will take time to test and improve these new measures.（作者萬喆是中國黃金集團首席經濟學家）