RMB devaluation warrants no currency war

Xinhua, August 13, 2015

While China's newly announced revision of the yuan's central parity rate formation system earned applause from the International Monetary Fund (IMF), some U.S. lawmakers, not surprisingly, began to grumble again about China's currency reform.

Accusations that China is manipulating the Renminbi (RMB) to gain a trade advantage do not hold water, and their worries that "China is waging a currency war" are exaggerated.

On Tuesday, the People's Bank of China (PBOC) announced that daily central parity quotes reported to the China Foreign Exchange Trade System before the market opens should be based on the closing rate of the inter-bank foreign exchange rate market on the previous day, supply and demand in the market, and price movement of major currencies.

Firstly, the decision was made against the background that the RMB's central parity rate has deviated from its actual market rate "by a large extent and for a long duration," which has "undermined the authority and the benchmark status" of the central parity system.

The central bank aims to better reflect market development in the exchange rate between the Chinese yuan against the U.S. dollar, and the yuan's devaluation was a result of reforms intended to make its exchange rate more market-oriented.

The sharp fall in value of the Chinese currency after the announcement is a "one-off" adjustment, which has bridged the previously accumulated differences between the central parity rate and the market rate.