OREANDA-NEWS. May 17, 2012. In spite of hitting new highs consecutively, the effective exchange rate of the yuan remains stable.
 
Since the central bank of China increased the transaction value of the yuan against the U.S. dollar on April 16, the yuan exchange rate has remained active in a larger range and has reached a new high for two times. Especially on May 2, it hit a new high in the third consecutive trading day since the yuan exchange rate reform in 2005.
 
To the upward trend of yuan exchange rate, experts said that the sharp appreciation of the yuan will not appear at present and may slow down in the future. It shows a two-way fluctuating trend.
 
Fluctuation increases but still remains stable overall
 
The fluctuation of yuan exchange rate is related with China's exchange rate system. Zhao Qingming, an expert of international finance, said in an interview with People's Daily that the yuan exchange rate system currently is a managed floating exchange rate system based on market supply and demand and a basket of currencies. The U.S. dollar is an important index reference. If the U.S. dollar devaluates, the yuan will appreciate. The U.S. dollar fell on Monday and Tuesday and the yuan against the U.S. dollar rose on May 2.
 
Although the fluctuation of yuan exchange rate increased, it did not affect its stability. Zhao said that, in these days, intraday trading price relative to the opening price fell in most cases. This is because people commonly think that the yuan will not appreciate recently. The yuan devaluation was expected since the fourth quarter of 2011. In the beginning of 2012, the expectation for yuan devaluation decreased because the funds outstanding for exchange reserves changed from negative to positive. Many experts and banks think that the yuan will not appreciate but should remain stable or devalue in order to support export enterprises. The view will be reflected in foreign exchange transactions and lead to the drop of the intraday trading price relative to opening price. Eventually, the yuan exchange rate will not change too much.
 
Liu Yuhui, director of the Financial Laboratory of Chinese Academy of Social Sciences, said that although average exchange rate of the yuan against the U.S. dollar hit new highs consecutively, the effective exchange rate of the yuan remains relatively stable.
 
Causes of the fluctuations of yuan exchange rate
 
As for the causes why the exchange rate of the yuan has been fluctuating, Zhao Xijun, vice chairman of Institute of Finance and Economics at the Renmin University of China, said that overall, China's economy has a double surplus. Although the speed of double surplus is reduced at present, it still has certain pressure to the appreciation of the yuan.
 
Some analysts believe that the current fluctuation of yuan exchange rate is related with the strategic and economic dialogue between China and the United States.
 
A trader of foreign exchange market said that the appreciation of the middle rate of yuan may be related with the China-US dialogue and it may create a better atmosphere for the dialogue. However, the transaction prices are basically below the middle rate, which shows that there is not a basis to support the continuous appreciation of the yuan in the market. I
 
Frequency of fluctuations will increase
 
Zhao Qingming said that the yuan will be an upward trend in the future and the yuan against the U.S. dollar is expected to increase by 3 percent to 5 percent. The first reason is that the China's trade surplus of international balance of payments is still very considerable. The second reason is that there is an external appreciation pressure. The third reason is that the yuan needs further appreciation to return to a balanced state.
 
From the external pressure of yuan appreciation, Zhang Yansheng, secretary general of Academic Board of the National Development and Reform Commission, said that 2012 is the presidential election year in the United States. Both the Republicans and Democrats will seek votersбп support using the appreciation of yuan. Meanwhile, all of the world's major economy entities implement a loose monetary policy in recent years and the yuan is also faced with large arbitrage pressure due to overflow of global currencies.
 
Song Yu, Chinese macro-economist of the Goldman Sachs Gao Hua Securities Co., Ltd., said that the yuan exchange rate is expected to show a trend of two-way fluctuation in 2012. As the external demand has begun rebounding, the trend will remain until the second half of 2012. The appreciation of yuan will be faster in the second half of 2012 than in the first half.
 
Zhao Xijun concluded that generally speaking, the long-term unilateral appreciation of yuan will not happen in the future but the frequency and range of fluctuations will increase. The expectation of yuan appreciation will reduce but the exchange rate risk will increase. Therefore, enterprises must carefully guard against the risk.