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The good news is that the yuan's one-way fluctuation came to an end in 2011. The currency's two-way fluctuation was thoroughly demonstrated in December 2011 and the first four months of 2012.
Among the 19 trading days from December 6 to the end of 2011, there were eight trading days when the yuan depreciated against the U.S. dollar. From the beginning of 2012 to April 20, half of the 70 trading days saw the yuan depreciated against the U.S. dollar.
From December 30, 2011 to April 20, 2012, the yuan slipped 0.05 percent against the U.S. dollar. The Chinese currency has virtually realized two-way fluctuation.
The two-way fluctuation of the yuan's exchange rate will continue throughout the whole year and become a more common phenomenon, due to the changing balance of China's foreign trade and dramatic fluctuation in emerging economies.
Export increase and continuous trade surplus used to back the yuan's appreciation. So declining exports and trade deficit would do the contrary.
In January 2012, China witnessed drops both in imports and exports, which has been rarely seen in the past several years. Their total value was $272.6 billion, a 7.8-percent year-on-year decrease. Exports dropped 0.5 percent to $149.94 billion and imports declined 15.3 percent to $122.66 billion. Although exports and imports both saw year-on-year increases in February, a trade deficit of $31.48 billion appeared, the largest monthly deficit in a decade.
The large monthly trade deficit caused depreciation of the yuan exchange rate in the foreign exchange market. On March 12, the central parity of the yuan against the U.S. dollar nose-dived 209 basis points, the largest drop in one trading day for the past one and a half years.
The lingering subprime crisis and sovereign debt crisis that developed countries and regions are mired in have hindered their ability to import from China. In 2011, China's exports to the European Union, United States and Canada increased 14.4 percent, 14.5 percent and 13.7 percent, respectively, all lower than China's overall export growth in the year, which stood at 20.3 percent.
Developed countries and regions are our traditional export markets. Although it's estimated that China can gain surplus for the whole year of 2012, more monthly deficits may appear. Under this circumstance, the yuan's appreciation trend can be frequently interrupted by the changing balance of foreign trade or can even be reversed.
Unstable macroeconomic situations in emerging markets will intensify the fluctuation of the yuan exchange rate, via the international financial market. Economic fundamentals, market trends of primary products and increased capital liquidity will jointly produce drastic fluctuations in economic growth and currency exchange rates in emerging markets.
Almost all emerging economies, except China, witnessed two-digit depreciation of their currencies against the U.S. dollar in 2011, such as Russia, Brazil, India and South Africa. The depreciation of their currency exchange rates is closely related to their economic fundamentals.
Take India for instance. Continuous current account deficits for several decades after its independence caused the depreciation of the rupee in 2011. Also, India imports about 75 percent of its energy, giving the country enormous pressure for imported inflation. India's monetary authorities had to continue tight monetary policy to hedge inflation, leading to the longest period of interest rate hikes in its history, which has brought further damage to the real economy and made the rupee depreciate even more. Rubbing salt into wounds is capital fleeing the country.
Although $7.4 billion made its way into the Indian stock market by early March, pushing up the SENSEX index of the Bombay Stock Exchange by 11 percent, the basic economic regime in the country hasn't been utterly changed. The exchange rate increase and capital backflow in India in the previous two months are not stable and the situation can be easily reversed. By then, the more capital has flown back, the severer the impact will be when the capital flows out.
Emerging economies' prosperity in recent years partially stems from the boom of the commodities market. However, the primary goods have seen obvious price decreases, with the Thomson Reuters/Jefferies CRB Index plunging 8.3 percent in 2011. It's estimated that the import prices of commodities in 2012 will continue to drop, giving more pressure to emerging economies.
Hence, economic growth rates and exchange rates in emerging economies will see further intense fluctuations this year, which will increase the possibility of the two-way fluctuation of yuan exchange rate.
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