Since the beginning of 2015, the Chinese currency RMB has depreciated against the US dollar. On January 26, the exchange rate almost fell to the limit line, and broke the two-percent floatation band allowed by authorities for the first time.

Over the last decade the RMB has achieved a stable rise against the US dollar. Although the RMB's appreciation has increased the exchange rate pressure on exports, it has been objectively beneficial in improving the domestic economy. However, the situation changed last year when the exchange rate was about to fall below 6. This was directly related to the ending of America's QE (quantitative easing) policy.

During the international financial crisis, the United States launched three rounds of QE to promote dollar devaluation and protect the US economy. Since the U.S. dollar is the reserve currency of most countries in the world, the approach equates to shifting the burden of the crisis onto other countries. The U.S. dollar began to appreciate when QE ended, and the RMB began to devaluate.

The RMB devaluation has brought new uncertainties for China's economy, already under reconstruction. One obvious result is that it will decrease China's ability to absorb international investment and thus lead to an imported inflation. International capital in the Chinese market will flow out, which may cause a price decline in the stock and property markets.

China is actively expanding its own foreign investment. However, the RMB devaluation will lead to an increase in investment costs. The change of exchange rate indicates that the RMB still cannot free itself from the strong impact of the US dollar.

Faced with this situation, China should accelerate the RMB internationalization in the long term in order to improve the status of RMB in the global market, while in the short term it should take active measures to ensure risk management and prevent widening of risks brought by RMB devaluation.

This article was edited and translated from 警惕人民币贬值带来风险, source: Beijing Times, author: Zhou Junsheng.