Edited and translated by People's Daily Online

According to statistics from the China Foreign Exchange Trade System, the RMB's parity rate against the U.S. dollar was at 6.3342 on Dec. 7, a little lower than that of the previous day. The RMB declined the permitted 0.5 percent and hit its lower limit against the dollar in early trading for a six straight day on Dec. 7. 

Expectations of RMB appreciation ease

Liu Ligang, head of Greater China economics at Australia and New Zealand Banking Group, said on Dec. 7 that the RMB exchange rate against the dollar has been lower than the central parity rate set by the central bank for six consecutive days, indicating that the recent exchange rate fluctuations have resulted from pure market forces. The sharp drop in the RMB's value in recent days is more of a boon than a bane and can have long-term positive effects on RMB internationalization and the Chinese economy. 

Liu believes that the recent drop in the RMB exchange rate against the U.S. dollar was mainly caused by three factors. 

The first factor is a modest capital outflow from China in recent days. According to statistics from the central bank, China's foreign exchanges that hedge capital inflows recently decreased, indicating a modest capital outflow. 

The second factor is the recent appreciation of the U.S. dollar. Under the influence of market forces, certain investors are selling off their RMB assets to buy dollar assets, leading to a major reduction in the RMB appreciation pressure. 

The third factor is the European debt crisis. Due to the crisis, RMB appreciation is losing momentum, and the majority of investors believe that the RMB exchange rate would drop, so the RMB exchange rate has hit the lower limit of the floating range set by the central bank for several consecutive days. 

More two-way fluctuations to come

Sun Laixiang, a professor from the Department of Financial and Management Studies of the University of London, said that, in addition to the European debt crisis, there are also other reasons for the current decline in the RMB exchange rate. For example, China is experiencing a new round of economic adjustments and has also adopted tight monetary policies to regulate and control its real estate market, and that has lowered the outside world's short-term confidence in the RMB exchange rate. But in the long run, the Chinese market is still very powerful and attractive, and the RMB will also stay at a relatively steady level.

Alexander Klingberg, a researcher and senior consultant from the renowned Austrian think tank Austria Institute of International Studies, believes that the short-term buyers of the market have targeted China. He said signs are showing that China's economic growth is slowing down, and some hot money is flowing out of China. Meanwhile, since the world's demand for the U.S. dollar is increasing, the RMB may see a decline this time after staying at a high level for several months 

The recent fluctuations indicate that two-way fluctuations probably will be more common in the future, and even violent fluctuations may appear in the future. Xie Dongming, an economic analyst from the Overseas-Chinese Banking Corporation of Singapore, said that the change from one-way appreciation to two-way fluctuation means a new era for RMB transactions has started. Markets will strengthen their predictions about two-way fluctuations, and the scale of RMB transactions will also change accordingly.
Slightly weaker RMB helps stabilize economy

The general view of a weakened RMB in some degree is that it helps to stabilize exports and economic growth. And China's export enterprises will be the first beneficiaries. 

Liu said that the RMB exchange rate mechanism for two-way volatility will force many companies and individuals to consider more rate risks and will make the RMB exchange rate more flexible. Other analysts believe that this current volatility will lead to the reversal of cross-border capital flows, reducing enthusiasm for flowing speculative capital into China, a significant reduction in the pressure of international hot money inflows, reducing the foreign exchange and will help to control inflation.

The RMB exchange rate fluctuation also raised concerns about the foreign exchange reserves for the central bank. Reuters reported that the foreign exchange assets of the central bank were in decline for the first time in October this year in nearly eight years. 

Because of the concerns about the European debt crisis and gloomy prospects for global economic recovery, commercial banks and other financial institutions would like to hold foreign currency assets in anticipation of devaluation of the RMB. If the RMB exchange rate continues to decline, the foreign net assets of the central bank will drop again.

Xie said that the rate of RMB appreciation will slow down for the long term, but in short term, volatility will continue to exist and the RMB depreciate to the lower limit again at the end of the year. The volatility of the RMB is expected to continue next year in the current market. 

The central bank can stabilize the market with the central price of RMB exchange rate to stabilize the domestic market. But it cannot interpose foreign markets, which will be severely affected. The overseas market hopes to receive explanation for the continuous dropping-limit of the RMB to enhance investors' confidence.