Weakened yuan appears likely

China's yuan weakened against the dollar on Wednesday to its lowest level in more than four years as the People's Bank of China (PBOC) cut its daily reference rate for the seventh day in a row to 6.5314 yuan per dollar.

The fall is set to continue through 2016, Lu Zhengwei, chief economist with Industrial Bank, told Shanghai Securities News, adding that the yuan could depreciate as much as 15 percent to a rate of about 7.3 per dollar.

The yuan's slump has come amid turbulent economic times in China.On Monday, the first trading day of 2016, the country's stock market shut down early when a newly introduced "circuit breaker" was triggered by a 7 percent decline in the CSI 300 Index of large-capitalization companies. That fall helped to send stocks lower in the rest of the world as well.

"The Chinese authorities want to stabilize the trade-weighted exchange rate. Since the dollar is appreciating against other currencies this means the yuan is likely to have a small depreciation against the dollar," David Dollar, a senior fellow at the Brookings Institution's John L Thornton China Center in Washington wrote in an e-mail.

Jeffrey Frankel, the James W. Harpel Professor of Capital Formation and Growth at Harvard University's Kennedy School of Government, said the recent depreciation of the yuan against the dollar is only a small reversal of the trend of the previous 10 years when the Chinese currency was allowed to appreciate against the dollar.

"The switch can be explained by economic fundamentals: the Chinese economy is naturally slowing down, at a time when the US economy is performing relatively better, and so Chinese monetary policy has eased at a time when the Federal Reserve is beginning to raise interest rates," Frankel said in an e-mail.

Frankel said that the PBOC is allowing the exchange rate to reflect economic fundamentals to some extent -- as opposed to intervening so heavily in the foreign exchange market that the yuan/dollar exchange rate remains fixed as had been the practice 10 years ago -- is appropriate for a country of China's size.

"Allowing the market a bigger say in determining the exchange rate is also what US politicians have long been urging China to do. It is a case of 'be careful what you wish for' because under the conditions that have held since 2014, this means a weaker yuan, which means greater competitiveness for Chinese industry versus American industry," added Frankel.

For Chinese consumers, the price of manufactured goods is likely to be stable or declining, while prices for services will rise modestly, said Dollar.

Global stock markets declined on Wednesday to their lowest in nearly three months, according to Reuters, which cited the move to weaken the yuan as sparking fears about China's economy, low oil prices and North Korea's announcement it had tested a hydrogen bomb.

The White House said Pyongyang might not in fact have tested a hydrogen bomb, which is much more powerful than an atomic bomb.

"The big influence continues to be concerns about what's going on in China ... in what appears to be an economy getting a little out of hand," Stephen Massocca, chief investment officer at Wedbush Equity Management, told Reuters.

paulwelitzkin@chinadailyusa.com