Though the Chinese currency, the renminbi or yuan, weakened for the third consecutive day on Tuesday, analysts have said that a sharp drop is unlikely despite persistent depreciation pressure.
The central parity rate of the RMB retreated by 30 basis points to 6.1543 against the U.S. dollar on Tuesday, according to the China Foreign Exchange Trading System.
The recent RMB depreciation can be attributed to a stronger U.S. dollar and holiday distortions as Chinese people have been purchasing foreign exchange to pay off credit cards used overseas during China’s Lunar New Year holiday, according to Xie Yaxuan, an analyst with China Merchants Securities.
The U.S. dollar is expected to ascend to even higher levels thanks to a notable inflow of money to the United States due to quantitative easing (QE) tapering, the mass QE program adopted by the European Central Bank and political volatility in Greece.
With the interest rate cut on Saturday by the People’s Bank of China, the market is betting on the RMB to weaken further.
Wen Bin, chief economist with China Minsheng Bank, predicted a three-percent depreciation for the RMB in 2015 and for its exchange rate against the U.S. dollar to hit 6.4 at year’s end. It has fallen more than one percent so far.
Despite the RMB’s downward trend, analysts have dismissed the possibility of the RMB taking a dive, citing China’s huge currency reserves and the havoc a too-weak RMB will cause to the economy.
“The redback might weaken a bit further against the strengthening greenback but an outright tumble appears still unlikely,” said HSBC in a research note.
The mammoth foreign exchange reserves of 3.8 trillion U.S. dollars that China holds will help the RMB maintain a stable exchange rate against other major currencies, said Lin Caiyi, chief economist with Guotai Junan Securities.
Though significant exchange rate depreciation might help some Chinese exporters’ profit margins, it is unlikely to spur a sharp acceleration in shipments amid still lackluster global demand, according to the HSBC note.
Aggressive RMB depreciation would only depress domestic demand further, the note said. Enditem