China Plays Down Trade Impact Of RMB Yuan Depreciation

China Plays Down Trade Impact Of RMB Yuan Depreciation

$USDCNY

The Ministry of Commerce (MOC) has defended China’s overhauling of its exchange rate formation mechanism, a move which has seen a significant drop in the RMB Yuan’s central parity rate Vs the USD.

There has been concern in the international market over the connection between the RMB Yuan’s depreciation and China’s efforts to boost exports.

However, the MOC said in a statement late Friday night that the drop, of 4.6% in 3 days after the adjustment on 11 August, was “a normal adjustment” and will have limited impact on foreign trade.

Since late last year, there had been a significant discrepancy between the RMB Yuan’s central parity rate and the spot trading rate. The new quotation method of the central parity helped narrow the gap and allowed the market to play a bigger role in determining the Yuan’s exchange rates, the statement said.

On 11 August, China’s central bank ordered that daily central parity quotes reported to the China Foreign Exchange Trade System before the market opens should be based on the closing rate of the inter-bank foreign exchange market the previous day, supply and demand, and price movement of major currencies.

After dipping 4.6% in the following 3 days, the RMB Yuan’s central parity Vs the USD has stabilized.

“Under a global value chain, there is a downstream and upstream industrial division and international trade within a single industry is very common. So the boosting effect on exports arising from a currency depreciation will be shared by various economies and thus weakened,” according to the MOC.

It said the impact of a 1-off rate adjustment on Chinese exports will be limited because around 50% of it is accounted for by processing trade, in which products’ raw materials are imported to China and the finished products are re-exported after assembly.

There is no basis for continued depreciation of the currency, and the exchange rate will be kept “basically stable at an adaptive and equilibrium level,” the statement  said.

Have a terrific weekend.

HeffX-LTN

Paul Ebeling

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