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The continued devaluation of the renminbi （yuan）， China’s legal tender， has sparked concerns both in China and abroad. The depreciation trend that started in August 2015 hasn’t shown any signs of reversing， but as a matter of fact， the depreciation of the yuan is an inevitable outcome of its internationalization.
China is moving to turn the yuan into a global currency. For this purpose， the currency has to adopt a market-oriented exchange rate regime in the first place.
The reform of the yuan’s exchange rate regime has been carried out prudently in order to ensure the stability of the Chinese economy. China didn’t formally kick off the reform until 2005. Moreover， it might have unfolded more steadily without the 2008 global financial crisis， which interrupted the process.
On August 11， 2015， the People’s Bank of China， the country’s central bank， restarted the reform of the yuan’s exchange rate regime 10 years after the first attempt was initiated， and announced the adjustment of the formation mechanism of the yuan’s central parity rate. The central parity rate of the yuan against the U.S. dollar dropped by 2 percent that day， the largest margin of decline in history. Since then， the yuan has devalued continuously， contracting by 7 percent in five months from a central parity rate of 6.1162 against the greenback on August 10 last year to 6.5720 on January 12.
The depreciation has been caused by multiple factors. First， it is a direct result of the appreciation of the U.S. dollar. In fact， the yuan has been showing a tendency for devaluation since the beginning of 2014 amid market expectations of a stronger dollar. Second， the pessimistic forecast of the Chinese economy due to its recent slowdown has also affected the value of the yuan.
Moreover， China had promised to make the yuan freely convertible when the currency was added to the Special Drawing Rights basket of the International Monetary Fund in November 2015. This increases the supply of the yuan in the international market and thereby causes the currency to devalue.
Finally， the reform of the yuan’s exchange rate regime put in place by China’s central bank last August has resulted in larger margins of fluctuation. As a result， the value of the yuan has shrunk sharply under downward economic pressure.
As long as the yuan’s exchange rate is decided by the market， the depreciation or appreciation of the currency is both understandable.
China is moving to turn the yuan into a global currency. For this purpose， the currency has to adopt a market-oriented exchange rate regime in the first place.
The reform of the yuan’s exchange rate regime has been carried out prudently in order to ensure the stability of the Chinese economy. China didn’t formally kick off the reform until 2005. Moreover， it might have unfolded more steadily without the 2008 global financial crisis， which interrupted the process.
On August 11， 2015， the People’s Bank of China， the country’s central bank， restarted the reform of the yuan’s exchange rate regime 10 years after the first attempt was initiated， and announced the adjustment of the formation mechanism of the yuan’s central parity rate. The central parity rate of the yuan against the U.S. dollar dropped by 2 percent that day， the largest margin of decline in history. Since then， the yuan has devalued continuously， contracting by 7 percent in five months from a central parity rate of 6.1162 against the greenback on August 10 last year to 6.5720 on January 12.
The depreciation has been caused by multiple factors. First， it is a direct result of the appreciation of the U.S. dollar. In fact， the yuan has been showing a tendency for devaluation since the beginning of 2014 amid market expectations of a stronger dollar. Second， the pessimistic forecast of the Chinese economy due to its recent slowdown has also affected the value of the yuan.
Moreover， China had promised to make the yuan freely convertible when the currency was added to the Special Drawing Rights basket of the International Monetary Fund in November 2015. This increases the supply of the yuan in the international market and thereby causes the currency to devalue.
Finally， the reform of the yuan’s exchange rate regime put in place by China’s central bank last August has resulted in larger margins of fluctuation. As a result， the value of the yuan has shrunk sharply under downward economic pressure.
As long as the yuan’s exchange rate is decided by the market， the depreciation or appreciation of the currency is both understandable.