RMB expected to stabilize after forex adjustment

The Chinese currency renminbi (RMB), or the yuan, should remain strong in the long run, a central bank official said Thursday, after worries that the bank's adjustment of the exchange rate mechanism earlier this week would lead to a slump in the currency.

The value of the yuan has gradually returned to market levels as the discrepancy between the central parity rate and the actual trading rate has been largely corrected after declines in the past few days, Zhang Xiaohui, assistant governor of the People's Bank of China (PBOC), said during a press conference here.

There used to be a 3-percent gap accumulated between a lower official rate and higher market expectations, she said.

The PBOC adjusted the exchange rate formation mechanism Tuesday, which it said was designed to close the gap and better reflect market development.

The move triggered consecutive sharp falls in the yuan. The central parity rate weakened 704 basis points, or 1.1 percent, to 6.401 against the U.S. dollar Thursday, narrowing from Wednesday's 1.6 percent and almost 1.9 percent Tuesday.

The weak performance exacerbated market concerns over the currency's prospects, with many wondering if a long-term decline was on the cards.

But Zhang said there are no grounds for persistent and substantial depreciation as sound economic fundamentals determine that the yuan will re-enter a rising streak.

Surplus in goods trade reached 305.2 billion U.S. dollars in the first seven months of 2015, according to official figures. Zhang cited this as a decisive factor in the market and a fundamental prop for the currency.

China's 7-percent economic growth will create sound conditions for the yuan to hold steady, along with increasing demand for the currency from overseas companies, abundant foreign exchange reserves, stable fiscal condition and a healthy financial system, she said.

Given China's huge trade surplus, the yuan has remained strong in recent years compared with major currencies, with appreciation of around 50 percent since a milestone reform that depegged the yuan from the U.S. dollar in 2005.

"The central bank is capable of keeping the exchange rate basically stable at an adaptive and equilibrium level," Zhang said.

Prices of yuan in both onshore and offshore markets showed signs of improvement Thursday after the press conference.

A MORE MARKET-DETERMINED YUAN

Another senior official, Yi Gang, dismissed media reports that Chinese authorities had demanded 10-percent depreciation in the yuan by the end of 2015 in hopes of rescuing the country's slipping exports, describing such reports as "completely baseless."

"Under a managed floating exchange rate system, the value of the yuan is determined by the market," said Yi, who serves as deputy governor of the PBOC and director of the State Administration of Foreign Exchange.

Yi said the central bank "no longer regularly intervenes in the exchange rate but will continue to manage it, especially when volatility exceeds a tolerable range, to let market forces decide the yuan's valuation."

The central parity rate is currently released before the opening of the interbank market each trading day, based on a weighted average of prices offered by market makers and referring to the closing price on the previous day. The yuan is allowed to trade on the spot market within 2 percent of the rate.

The system fits China as it allows for flexibility in the rate and enables effective control of excessive volatility, which boosts market confidence and facilitates stable economy, according to Yi.

"The mechanism improvement is a boon for market confidence and the global journey of the currency," he said.