On March 26, 2014, China Review News Agency published an article on the abnormally sharp decline in the RMB exchange rate this year. In 2012 and 2013, China reduced its goal for maintaining the growth of GDP down from eight percent to seven percent. Last year, as a result, import and export businesses started to slow down. In the past, the appreciation of the RMB (the Chinese yuan) exchange rate resulted from the depreciation of the U.S. dollar. With the recovery of the U.S. economy and the appreciation of the U.S. dollar, the depreciation of the RMB exchange rate has become the trend. Since 2013, a large-scale cross-border capital flow in and out of China has been an indisputable fact. Starting on March 17, 2014, the People’s Bank of China widened the USDCNY trading band to +/-2 percent from +/-1 percent. Thus a larger-scale cross-border capital flow should happen, which may result in a turbulent foreign exchange market and volatile financial markets. Although China holds US$ 3.8 trillion in foreign exchange reserves, they are very limited as China relies more and more on importing fundamental resources from abroad.
The article concluded that excess promotion of the market-determined exchange rate mechanism may intensify the fluctuations of the interest rate in China and not benefit the stability of financial markets. China is not ready to liberate the RMB exchange rate in the market fully because the RMB interest rate and China’s price system are not market-oriented.
Source: China Review News Agency, March 26, 2014
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