Why international markets are wrong to expect continued renminbi depreciation

January 2016 may have been one of the most turbulent periods for the Chinese economy since the country’s reform and opening up. Within a month, the stock market fell more than 20 per cent, wiping out 10 trillion yuan worth of A-share value. Annual GDP growth fell to a 25-year low and, although within expectations, the negative impact is serious.

There are tough choices to be made over the renminbi exchange rate, which is in the early stages of market-oriented reform. According to international market expectations, the renminbi is expected to continue to depreciate. However, the Chinese government, including the central bank, does not agree.

Some people worry that exchange rate volatility is likely to become the next factor after the stock market to trigger significant risks. So, will this be the case?

The fact that the international market almost overwhelmingly thinks the renminbi will continue to fall in 2016 is inadequate proof that it will actually happen. An overview of world economic history shows that there is little likelihood of people actually predicting the reality, and sometimes the results may be just the opposite.

READ MORE: Falling oil prices are a benefit, but it will take time to see that

Take crude oil prices, for example. No one would have predicted the current price two years ago. When the price fell below US$30, some expected it to fall further, to US$20, or even more outrageously, to US$10. When most oil production companies worldwide are facing losses, and the crude prices seriously deviate from the cost of production, can the price reflect the proper value?