Weaker yuan is a double-edged sword

A weaker Chinese currency could help ease pressure on the country's exporters, but means higher investment costs for companies that intend to expand overseas, analysts said on Dec 29.

Citing false bidding prices from the Bloomberg foreign exchange system, media reported a day ealier 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, says the depreciation of the renminbi will enable companies to put their export volume 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, says that a weaker currency would mean greater risk-hedging costs for companies that 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 says. "The pressure will likely be greater next year (2017) 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."

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 before the currency falls below 7 yuan per dollar given the tightening cycle of the US Federal Reserve and decreasing investment returns at home.

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

Contact the writers through lixiang@chinadaily.com.cn