RMB devaluation warrants no currency war

Xinhua, August 13, 2015

Besides, the exchange rate formation mechanism reform neither simply equals currency devaluation, nor means a devaluation trend of the RMB.

Secondly, China has not devaluated its currency on purpose to benefit its exporters at the expense of overseas competitors. The lower exchange rate is just a byproduct, not a goal.

China's exports have indeed witnessed a slump this year, but this is largely a reflection of sluggish external demand. Fortunately, China has sufficient policy ammunition to boost domestic demand to offset external headwinds.

According to the HSBC, both monetary and fiscal policies are becoming more accommodative and better coordinated, as evidenced by the reports that policy banks will issue more than 1 trillion yuan in financial bonds to support infrastructure investment.

The HSBC forecast that "the combination of monetary and fiscal policy support should help ensure that the economy [is] on a path of cyclical recovery and achieve the growth target of around 7 percent."

Thirdly, a weakening of the currency has resulted from relatively slow real economic growth, and a stable exchange rate needs a steady economy.

As the U.S. economy has gained fresh recovery momentum, it is natural that the U.S. dollar has appreciated.

Meanwhile, China, which is undergoing a "new normal" in its economy that demands shifting its development model to a more balanced and sustainable one, still needs time to stabilize. Thus, it comes as no surprise that the RMB exchange rate will not stabilize until the economy itself is stable.