02:07 GMT27 September 2020
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    The yuan slid to its weakest level since May 2008 on Tuesday, stirring speculation over whether the Chinese government will tolerate a slide beyond the key level of 7 per US dollar.

    There are growing expectations that the currency will soon test 7 per US dollar, a level unseen since the global financial crisis.

    But although that level is a key psychological mark, it lacks great practical significance. We don't think the country should defend the psychological level at any cost.

    The fall in the yuan has come as Sino-US trade friction intensifies, during which a moderate depreciation of the yuan is unavoidable and merely a reflection of supply and demand. If the yuan falls through the 7 per US dollar level, a market-driven depreciation will serve as an automatic economic stabilizer and benefit China's exports. Although currency depreciation will have a negative effect on the economy, the benefits will outweigh the costs of a moderate depreciation.

    READ MORE: Venezuela Ditches Dollar for Euro, Yuan Amid 'Illegal' US Sanctions

    So far this year, the Chinese authorities have intervened less in the yuan market than they did in 2015 when the currency posted a drastic depreciation, because panic has yet to peak in this round of depreciation. Most domestic traders still believe there is no basis for a massive yuan depreciation given strong economic fundamentals, a sustained trade surplus, the nation's sound fiscal position and ample foreign exchange reserves.

    Even if the yuan falls below 7 per US dollar, it would have a limited psychological impact. Various factors are increasing depreciation expectations, but the situation is still controllable. China has yet to face a currency crisis in which the central bank has to intervene.

    Still, currency market participants are closely watching to see whether China's foreign exchange reserves will fall below $3 trillion. If the central bank uses the reserves to prop up the yuan, it will also have a psychological impact on the market.

    A moderate depreciation of the yuan beyond 7 per US dollar isn't unacceptable. Amid the escalating trade friction with the US, the Chinese market is learning how to stay calm amid a market-driven depreciation of the yuan. The country will continue to deepen its market-oriented exchange rate reform. There is no need to safeguard the level of 7 per US dollar at any cost.

    This article originally appeared on the Global Times website

    The views and opinions expressed in the article do not necessarily reflect those of Sputnik.


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