CNY is no longer “significantly undervalued”

The U.S. Treasury dropped its view that China's currency is "significantly undervalued" while saying that the forces driving appreciation in the longer term remain and China needs to allow such strengthening eventually. 

The CNY remains "below its appropriate medium-term valuation," the department said yesterday in its semi-annual report on foreign-exchange policies. The "core factors" that have driven the appreciation of CNY in recent years remain in place, such as a large and growing current-account surplus, and net inflows of foreign direct investment. 

Even so, the department refrained from characterizing China's currency as significantly undervalued, as it has in each foreign-exchange report since May 2012. The Treasury also recognized that with an economic slowdown and stock-market volatility, "market factors are exerting downward pressure" on CNY. 

The International Monetary Fund, by contrast, adopted the view in May that CNY is "no longer undervalued." 

"To a large extent, both statements appear in line with the fact that market expectations of continuous CNY appreciation are gradually diminishing. Given the economic slowdown, CNY is under pressure to weaken in the next 12-18 months", says Commerzbank.