China’s central bank shocked the markets on 11th August 2015 when it devalued its currency, the yuan, by lowering its daily mid-point trading price to 1.87 per cent weaker against the US dollar. The bold action is seen largely as a bid to boost the competitiveness of its exports but is not without implications for its ambition to internationalize the currency and risks triggering capital outflows.
A year since the big flop, the devaluation wave did not cease. Even though PBoC sets the midpoint fixing stronger to 6.6435 on its anniversary, RMB experienced a total 8.6% drop over the 1-year period.
Weak domestic fundamental has contributed to the softness in RMB. The steady and quiet expansion of China’s economic activity might be treated as the “New Norm” from the authority’s perspective. Still, weakness in growth may drive away the demand of RMB from investors. China’s GDP growth continues its downtrend for three consecutive years from 7.8% to the current 6.7%. The market projects its growth would drop notably to 4.8% in 2020. Acceleration in capital outflow could be noticed. For instance, by the end of 2015, total Chinese outbound real-estate investment recorded nearly US$30 billion, twice that of 2014, more inpiduals and institutions are persifying their assets amidst the devaluation of RMB. After all, the soft economic growth prospect is believed to advance the drop in value for the yuan.
Nevertheless, Status as the IMF’s reserve currency gains Central Bank’s demand for the yuan The Yuan earned the International Monetary Fund’s reserve status last November after a year of struggle. The entry would be exercised at 1st October-2016 and RMB (10.92%) would follow USD (41.73%) and EUR (30.93%) as the third largest reserve currency. Market believes that this would build in demand for RMB in the long run as this encourages Central Banks around the world to build up their holdings of yuan to persify their foreign exchange reserves.
Still, pergence in U.S.-China economic conditions adds pressure on RMB depreciation. The view of some economists and foreign-exchange strategists hold that a stronger U.S. dollar will likely lead to a gradual depreciation in the yuan over the next 12 months as China strives to limit economic volatility. “It’s more about the dollar strengthening than the renminbi weakening,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman. The People’s Bank of China “will tolerate market forces, because market forces are moving in their desired direction.”