Yuan remains stable after PBOC dispels rumors

RMB will break 7 in 2017, but depreciation will be milder: experts

The yuan's exchange rate remained stable on Thursday, after the People's Bank of China (PBOC), China's central bank, dispelled rumors that the yuan had broken through the 7 level.

The PBOC set the yuan's central parity rate at 6.9497 against the U.S. dollar on Thursday, down only two basis points compared with the previous day.

Experts noted that it won't be long before the yuan actually slips below the 7 level, but the government wants to extend the occurrence to help the market psychologically prepare.

On Wednesday, some domestic financial websites claimed the yuan's onshore exchange rate had reached 7 against the dollar, citing Bloomberg data. The domestic reports also noted that the 7 level is a "psychological barrier" for the markets.

The PBOC dispelled the report on Wednesday night on its official Weibo account, saying that the onshore yuan's exchange rate against the greenback fluctuated stably between 6.9500-6.9666. The PBOC also noted that it preserved the right to claim responsibility from the rumormonger.

The onshore yuan closed at 6.9560 against the dollar on Wednesday, down 20 basis points compared with the previous trading day.

A report on yicai.com on Thursday quoted Bloomberg as saying that they automatically updated the yuan's exchange rate after receiving data from a relevant source. Later, the source reported to them that the data was flawed, and the rate was modified at the earliest time possible.

Similar errors have also been made by other overseas companies. Google, for example, wrongly reported the yuan's exchange rate on December 6, according to domestic media reports.

Cautious attitude

Xi Junyang, a professor at the Department of Finance of Shanghai University of Finance and Economics, echoed the PBOC's statement and noted that 7 is an integer, which will more easily arouse attention psychologically.

"This rule applies to other financial areas as well, such as the stock markets, where people tend to talk about 3,000 points or 3,100 points," he told the Global Times on Thursday.

Liu Xuezhi, a macroeconomist with the Bank of Communications, also said that there's a relatively sensitive mood in the market concerning the yuan's depreciation. "The trend is that such a nervous mood is getting more and more intensified," Liu told the Global Times on Thursday.

The PBOC's urgent response to Bloomberg's error also showed that the government is taking a very cautious approach toward the yuan's exchange rate, experts said.

"The government is concerned about the possibility of further capital outflows, spurred by expectations for the yuan's further depreciation. Such worries have outweighed the fact that a slumping yuan is actually good news for certain economic sectors, such as exports," Liu said.

Xi also noted that the domestic consumer price level was edging up moderately, and that the yuan's depreciation might add to the possibility of inflation, which the government does not want.

The Consumer Price Index, a main gauge of inflation, edged up 2.3 percent year-on-year in November, still a relatively safe distance from the 3 level that demarcates inflation, Xi noted.

Moderate crossover

Commenting on the yuan's fluctuations in 2016, Liu said that the Chinese currency's depreciation scale has been weaker compared with other currencies like the ruble. "Besides, currency fluctuation is very normal in any market economy," he noted.

He also pointed out that the market nerve is intense as the yuan had been appreciating for a relatively long time, and the central parity rate reform in August 2015, which triggered the yuan's depreciation trend, caught people unprepared.

The yuan's exchange rate has slumped by about 6. 9 percent in 2016. On January 4, the yuan's central parity rate stood at 6.5032 against the dollar.

According to Liu, the yuan breaking through 7 will be highly probable in the first quarter of 2017, but the depreciation level will be milder compared with this year.

"I don't think the U.S. government will tolerate the yuan's continuous depreciation, which hurts U.S. exports to China," he said.

Xi also noted that the yuan would break through the 7 level in 2017, but for the moment the PBOC still hopes to guard the gate. "The government wants to maintain the 6.9 level for a while to help people prepare," he added.