Careful Observation of China’s Economy and Declining Yuan

By Tetsushi Kajimoto

CHENGDU, China – Japanese Finance Minister Taro Aso stated on Saturday that he is carefully monitoring China’s economic situation along with the recent declines in the yuan. These concerns emerged amid the broader impact of Britain’s decision to exit the European Union, which was a focal point during a gathering of the G20 leading economies.

After the first day of meetings with finance ministers and central bankers in the southwestern Chinese city of Chengdu, Aso indicated that he and U.S. Treasury Secretary Jack Lew both agreed on the importance of structural reforms in China and the need for improved transparency regarding its currency.

Aso emphasized, "Lew and I agreed on two key points: the necessity for China to pursue economic structural reform and to enhance transparency within its yuan currency system."

During the discussions, Aso acknowledged that the global economy is experiencing a moderate recovery; however, he noted that there are still significant downside risks and uncertainties present in the outlook.

He pointed out that while the decline in other emerging market currencies has somewhat stabilized, the yuan has continued to fall since the Brexit vote, reaching levels comparable to when China allowed its currency to become more flexible in June 2010.

"I highlighted at the G20 meeting the need to remain vigilant regarding the future trajectory of the Chinese economy, particularly in relation to the yuan," Aso remarked.

He expressed concern that excessive volatility in currency markets could have detrimental effects on the economy, reinforcing the commitment to maintain stability in financial markets.

The Brexit vote on June 23 triggered an increase in demand for the Japanese yen, which rose to 99 to the dollar. In response, Japanese officials issued warnings against rapid increases in the yen’s value, which could jeopardize the export-driven economy and undermine efforts to escape deflation.

"Currently, the yen has stabilized around 106. Given this situation, I refrained from commenting on currency matters during my earlier bilateral discussions with Lew," Aso explained.

In previous discussions, Aso and Lew had differing perspectives on currency movements. Aso expressed concern over the rapid rise of the yen, while Lew argued that foreign exchange fluctuations were orderly, a comment interpreted by markets as a signal against intervention.

Lew remarked that the commitments by G20 member countries to avoid competitive currency devaluations have played a significant role in maintaining economic confidence, according to a statement summarizing the discussions between the two finance leaders.