Since the start of 2014, currency depreciation and stock market falls in a number of emerging economies have prompted worries that the yuan will follow suit and be drawn into a process of devaluation. In response, experts say that steady economic growth and large surpluses in trade and balance of payments will safeguard China against massive capital flight or any sharp drop in currency value, and that two-way fluctuations of the yuan exchange rate are to be expected as a norm in the future.

Capital flees from emerging markets

The tapering of QE initiated by the US Federal Reserve last December has led to massive capital flight from emerging markets which are highly dependent on foreign capital for economic growth. As a result, currency exchange rates in such economies have plunged sharply, in turn exerting an impact on stock markets in the US and Europe. The Turkish lira, Argentine Peso, Russian ruble, and South African rand all dropped in late January, while stock exchanges in Europe and the US experienced dramatic falls on Jan. 24, with stocks in companies heavily involved in emerging markets taking the hardest hits.

As the financial floodgates have opened, large amounts of international capital are withdrawing from emerging economies at a higher pace. Statistics released Feb. 7 by EPFR, an institution that monitors global fund flows, show that the value of outflows from emerging market equity funds since the beginning of 2014 have already surpassed the whole of 2013; meanwhile developed markets have become the new favorite for global capital, attracting an inflow of over $20 billion in equity funds this year already - the number for the same period last year was only $2 billion.

The yuan unlikely to depreciate sharply

According to data compiled by Bloomberg, since the start of 2014, among all the 24 major emerging market currencies in the world, the yuan is the only one that has gained value against the US dollar. Analysts attribute this to two factors - that China still enjoys huge surpluses in its trade and balance of payments account, and that the Chinese economy maintains a higher degree of independence compared with other emerging economies.

“Although growth in the Chinese economy has slowed down, it still outperforms that of other economies," said Sun Huayu, vice president of Jinan University’s International Business School. "While foreign investors can still make money in China, it is not very likely that they will flee; even if they do, the surplus in China’s current account can still make up for the deficit in its capital account, which means the yuan will continue to face pressure to appreciate.”