Deepening reforms can help China tackle challenges

Deepening reforms can help China find solutions to a series of problems caused by the slowing down of economic growth and depreciation of the yuan, according to an article in the 21st Century Business Herald. Excerpts:

The funds outstanding for foreign exchange in Chinese financial agencies increased 128.2 billion yuan ($21 billion) in February, the smallest growth since October. Analysts believe this change indicates the pressure caused by the cross-border capital inflows is weakening, which is also proved by renminbi’s recent depreciation against the US dollar.

China’s central bank enlarged yuan’s daily trading range from 1 percent to 2 percent starting on March 17. Renminbi’s exchange rate versus the US dollar is allowed to rise or fall 2 percent from a daily midpoint rate that the central bank sets each morning.

The observers think the Chinese government will continue to stimulate economic growth. But the government seems not to intend to do so by stimulus packages, which makes people doubt whether the yuan will continuously appreciate against the US dollar.

Meanwhile, the slowing down of China’s economic growth increasingly convinces the market that the problems accumulated during China’s economic growth may explode collectively, which aggravates the depreciation pressure for yuan. The first two months’ economic data was not unsatisfactory according to the planned target of the government. These factors all weaken people’s anticipation of yuan’s appreciation.

In this context, enlarging yuan’s exchange rate fluctuation range can effectively strengthen the resilience of the currency, and prevent speculative capital’s inflows.

Although the Chinese central bank has the ability to maintain the normal fluctuation of yuan’s nominal rate and the stability of yuan’s exchange rate, it cannot stop the capital outflows under the anticipation of depreciation.

Yuan’s internationalization is held as a symbol of China’s rise. The government will not abandon this objective. A premise for yuan’s internationalization is the currency’s stability and firmness.

But before China succeeds in structuring its economy, it is impossible for the government to internationalize yuan. Zhou Xiaochuan, governor of China’s central bank, said recently: “We have not done the homework well for yuan’s internationalization.”

Yuan will face lasting depreciation pressure in China’s restructuring. This environment may encourage outflows of capitals. This is the necessary cost for China’s transformation.