Xinhua Report States that Focus Should Be on How Level is Set

Xinhua News Agency, in a recent unsigned commentary wrote that debate over exchange rate of Yuan should focus on mechanism by which the currency level is set, not its actual valuation. According to the news report, the goal should be on perfecting the exchange rate mechanism so that it is able to guide the Yuan to a dynamic equilibrium. Therefore, the numeric value of the currency should take a backseat. At many times it gets difficult for the economists and lawmakers to determine whether Yuan is overvalued or undervalued. It is a fact that the exchange rate is influenced by a lot of factors such as capital inflows, foreign trade and growth prospects and hence, the difficulty is increased.

According to the Xinhua report, if the real focus of the debate is lost, that will cause some unreasonable acts like the obsession that some of the US politicians show by pressing for a drastic appreciation of the renminbi or the domestic resistance to any sort of appreciation of the major Chinese currency. In either of the two cases, that will be a lose-lose situation for not only China, but US as well.

The Deputy Governor of the People’s Bank of China, Yi Gang, during the International Monetary Fund meeting on last month stated that the trading band of the Yuan will be widened in the near future. Yuan, at this point of time, is allowed to trade 1% on either side of the official fixing. The band was doubled a year earlier by the Central Bank from its earlier value of 0.5%, marking the first widening since 2007.

J. Lew, the Treasury Secretary of US, on last month, stated that China is making some sort of progress on allowing the Yuan to strengthen and added that the currency movements of the same is being watched by him very carefully. Lew commented that he has explained the importance of expanding the band in which Yuan trades to the new leaders of China as well.

The year-end forecast for Yuan has already been boosted by Morgan Stanley to 6.1 per USD on this week from its earlier value of 6.3. Morgan Stanley stated that there are chances of further trading band expansion and the number of market participants can increase as well, hence, they decided to increase the forecast.