Fitch: Drop in RMB value shows China economy weak

ANKARA

Credit agency Fitch Ratings said that the depreciation of the Chinese renminbi by nearly 5 percent against the dollar this week underscores pressure on China's economy.

But the move also shows that the authorities remain committed to market-oriented reform, Fitch said, in a note released on Thursday.

"Fitch sees the reform process as aimed at tackling unresolved structural weaknesses. Allowing markets freer play at this juncture entails risks, but the authorities' calculation seems to be that the risks of doing nothing are greater," the note said.

"The People's Bank of China (PBoC) has presented the move as technical and operational in nature, highlighting that the market rate had deviated consistently from the central fix for several months and that the move would help push it closer to the market equilibrium.

“The change helps meet the IMF's criteria for including the renminbi in the basket making up the SDR (special drawing rights), where a five-yearly decision is expected from the IMF's Executive Board in October or November this year," the note said.

But Fitch said the move was clearly linked to declining exports and fixed-asset investment, and from broader concerns over growth.

"The depreciation is limited so far compared with some other large emerging markets – Brazil's and Russia's currencies have depreciated by 35 percent and 45 percent versus the dollar over the past year.

“However, allowing market forces freer play implies higher volatility and uncertainty. And allowing more market-driven volatility may seem counter-intuitive while the Chinese economy struggles to overcome the structural weaknesses that have built up in the phase of debt-driven, investment-heavy growth, including the likelihood of widespread debt problems in the corporate and local-government sectors.

“However, market forces are likely to be an essential part of the solution to these problems – by helping to allocate resources more efficiently, and highlight where the problems are concentrated," the note said.