Don't Be Fooled by Yuan Tumble. China's Currency Is Quite Stable

  • Yuan rose against currency basket amid drop versus dollar
  • China has said new currency basket better reflects yuan value

For all the uproar over the yuan’s fall, the Chinese currency is more stable than appearances might suggest.

While the yuan sank to a five-year low versus the dollar on Wednesday, it is valued at about the same level as in October against a basket of currencies representing China’s major trading partners, according to data compiled by Bloomberg. This trade-weighted valuation, calculated based on a methodology similar to the one published by the China Foreign Exchange Trade System, a unit run by the central bank, is less than 4 percent off the record high set in August.

The authorities unveiled the multi-currency index last month, saying a broader basket is a more reliable gauge of the value of the currency than the dollar-yuan exchange rate. Policy makers have repeatedly said that there are no fundamental reasons for a persistent depreciation in the yuan because the country still runs a large current-account surplus.

“The idea that China all of a sudden is sparking a new round of competitive currency devaluation” in developing countries is “really a stretch,” Stephen Roach, a senior fellow at Yale University and former Morgan Stanley non-executive chairman in Asia, said in an interview on Bloomberg Radio. “On a broad trade-weighted basis, which is more relevant measure for any economy to compete in the world, the Chinese currency’s flattened out.”

CFETS Index

The People’s Bank of China set the yuan’s daily reference rate against the dollar Wednesday at the lowest level since April 2011. The yuan has lost 0.9 percent this year, extending its 4.5 percent decline in 2015, which was the largest annual drop in more than two decades. The slump sparked a selloff across emerging markets as investors worried that other developing nations may weaken their exchange rates to gain a competitive edge.

By comparison, the Bloomberg gauge mimicking China Foreign Exchange Trade System’s new yuan index rose 1.4 percent last year, extending its gain since 2009 to 26 percent. The index is composed of 13 currencies, including the dollar, euro, pound and yen.

Analysts at Goldman Sachs Group Inc. said Tuesday that the yuan has “limited” room for further depreciation because slumping energy prices will help boost the current-account surplus in China, the world’s second-largest importer of oil, and offset capital outflows.

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