RMB slump worries overblown, two-way fluctuation expected

A $100 banknote is placed next to 100 yuan banknotes in this October 16, 2010 file picture illustration taken in Beijing. [Photo/Agencies]

BEIJING - Concerns triggered by the recent Chinese currency volatility against the US dollar are overblown, with two-way fluctuations between the currencies more likely for 2015.

A sharp depreciation of the Chinese currency will hamper its internationalization and may backfire as other countries engage in competitive devaluation, economists argued.

Stronger dollar

The yuan, or renminbi (RMB), continued depreciation against the dollar this week, with its spot exchange rate almost reaching the 2-percent floatation ceiling allowed by Chinese authorities. It's the sixth close call in seven trading days ending Tuesday, generating speculation on whether the RMB will begin a trend of depreciation.

Most economist believe the answer is no.

The currency's recent volatility is caused by factors like quantitative easing by the European Central Bank (ECB) and successive interest rate cuts in countries such as Australia, Denmark and Canada to tackle deflation and anemic economic growth risks, experts said.

The International Monetary Fund (IMF) last month predicted that consumer prices, a gauge of inflation pressure, will hover as low as 1 percent in advanced economies in 2015, lower than the forecast of 1.4 percent for 2014. Deflation normally leads to a string of economic challenges like dampened enthusiasm for consumption.

Experts suggest a holistic view on this issue.

"Global foreign exchange markets have undergone volatile fluctuations in the past two weeks. The yuan has depreciated against the dollar to some extent, but appreciated against major currencies like the British pound, euro and Japanese yen. It is not because the RMB is weakening against a basket of currencies, but because the dollar is growing strong too fast," said Xie Yaxuan, senior analyst with China Merchants Securities.

The dollar has been gaining momentum since July 2014 and the ongoing monetary easing of ECB and Japanese central bank will push the value of euro and Japanese yen even lower, leading to expectations that RMB will appreciate against them, said Sun Tao, a senior economist with the IMF.

Prior to the recent slump, the Chinese currency was consistently rising against the dollar, beginning with China's major foreign exchange reform in July 2005. Since then, the yuan has climbed more than 30 percent against the dollar.