(Yicai) Aug. 17 -- The Chinese yuan’s exchange rate to the US dollar will stay at a reasonable and balanced level in the medium to long term, despite its recent depreciation, as it is underpinned by solid fundamentals, the Financial News reported yesterday, citing experts.

The recent weakening of the redback against the US dollar is mainly caused by short-term pressure, such as a widening interest rate spread caused by diverging monetary policies in China and the US as well as a gradually strengthening greenback, said the Financial News, which is owned by the People’s Bank of China.

The Chinese yuan sank to as low as 7.3204 against the US dollar at the close of markets on Aug. 15, a plunge of over 1,700 basis points from July 31.

The US dollar has kept high since June and this has put pressure on the redback exchange rate, said Ming Ming, chief economist of CITIC Securities.

Economic recovery is still under stress, said Wang Qing, chief macro analyst of Golden Credit Rating. And the recent weak foreign trade data has affected sentiment on the foreign exchange market.

Although the yuan exchange rate has seen some swings recently, it remains in line with normal market fluctuations which are consistent with the country’s short-term fundamentals, as well as changes in the supply and demand balance, industry insiders said.

Under the market-oriented exchange rate mechanism, the yuan exchange rate will not form “a unilateral market” as it is supported by the macroeconomy, the balance of payments and the forex reserves, said Guan Tao, global chief economist of BOC Securities. The flexible exchange rate has created conditions for the implementation of independent monetary policy.

The trimming of the medium-term lending facility’s interest rate again in August shows that macro policy control is increasing, and the real economy’s momentum of recovery is likely to gain pace in the third quarter, Wang said. More policies to support the real estate sector could be rolled out next to reduce risk. As economic fundamentals improve, the yuan exchange rate will be supported.

The country still has plenty of policy tools to stabilize the exchange rate, Wang said. These include the foreign exchange risk reserve ratio, forex deposit reserve ratio and full-caliber cross-border financing macro-prudential adjustment parameters. 

Also, the US’ Federal Reserve is no longer hiking interest rates, so pressure on the yuan should ease in the second half, he added.

Editor: Kim Taylor