Analysts say weaker yuan is a double-edged sword

A local Chinese resident shows yuan and US dollar banknotes in Qionghai city, South China' Hainan province, Oct 10, 2016. [Photo/IC]

A weaker Chinese currency could help ease pressure on the country's exporters, but will mean higher investment costs for companies that intend to expand overseas, analysts said on Thursday.

Citing false bidding prices from the Bloomberg foreign exchange system, media reported on Wednesday that the value of the onshore renminbi against the US dollar dropped below 7 yuan, sparking a fresh round of concerns over a potential acceleration in the currency's depreciation.

The People's Bank of China, the central bank, immediately responded to the reports in a late night statement, condemning them for "being irresponsible" and confirming that the exchange rate of the renminbi has remained stable at between 6.9500 to 6.9666.

The overall expectation by analysts is that a weaker yuan could help boost export-oriented sectors such as commodities, textiles, shipping and chemicals.

Yu Jianlong, secretary-general of the China Chamber of International Commerce, said the depreciation of the renminbi will enable companies to have their export volumes on a firmer footing.

But some argued that the effect on boosting exports could be limited as the real exchange rate of the renminbi against a basket of currencies has not depreciated as much as the value against the dollar.

Xiao Lisheng, a senior finance researcher at the Chinese Academy of Social Sciences, said that a weaker currency would mean greater risk-hedging costs for companies which plan to borrow dollar-denominated debt and seek to make outbound investments.

"The PBOC's prompt response highlighted the fragile market sentiment toward the value of the renminbi," Xiao said.

"The pressure will likely be greater next year for China's policymakers as they are facing a tough option of either maintaining currency stability with tighter monetary policy or maintaining growth with a more accommodative policy," he added.

The value of the Chinese currency has depreciated against the dollar by more than 7 percent this year, hitting a record low in eight years. Some economists believe that it is only a matter of time for the currency to fall below 7 yuan per dollar given the tightening cycle of the US Federal Reserve and the decreasing investment returns at home.

"The depreciation of the renminbi means greater costs for currency conversion," said Xie Delong, vice-general manager of Sichuan Dawn Machinery Co.