Recent moves to alter the mechanism for setting the value of China’s currency, the yuan against the U.S. dollar (US$) are positive as they increase the flexibility of currency. However, the resulting depreciation in the yuan is not likely to boost export growth, according to Moody’s Investors Service Inc.
Along with a surprise devaluation on Aug. 11, the People’s Bank of China (PBOC) also announced that it would start basing the fixing rate of the yuan against the US$ on the previous day’s market prices. A release from Moody’s on Friday says the New York-based credit-rating agency views the move as a credit positive for China: “The most significant credit implication of this policy shift is that it constitutes progress along the path toward capital account liberalization.”
Moody’s also notes that the depreciation that accompanied the shift in the exchange regime “does not have material credit implications because it will not significantly bolster export growth. In addition, China’s strong external reserve position limits any negative credit impact from market volatility.”
The magnitude of current yuan depreciation is not large enough to boost China’s currency competitiveness, Moody’s adds: “The restoration of sustained, stronger export growth will likely depend on a more robust recovery in demand from the developed market economies than currency depreciation.”
In addition, although there could be some further downward pressure on the exchange rate this year, Moody’s believes that a sharp depreciation is unlikely. There are several fundamental factors that should support the exchange rate, according to Moody’s, including a sizable current account surplus and an estimated US$3.7 trillion in official foreign-exchange reserves.
“Moreover, the Chinese economy’s net international assets are equivalent to 17% of [gross domestic product] and allow it to withstand some amount of exchange rate volatility,” Moody’s notes.