The renminbi has weakened against the US dollar over the past two years,drawing a great deal of attention and concern. The public keeps asking what happened to the renminbi and what is the outlook? Should people change their renminbi into US dollars or perhaps buy gold instead? We need to overcome our fears and take a rational view of the trends on the foreign exchange market. And we need to make a rational judgment of the renminbi's prospects over the next two years and taking apporiate response in coping with the changes of foreign exchange market.

Whether the renminbi strengthens or weakens is effectively determined by the public's confidence in China's economic growth and the prospects for a structural reform of the economy. Investors at home and abroad are effectively voting on this issues with buying and selling dollar or renminbi. The outcome of this vote decides the strength or weakness of the currency. If we look at the facts with rational manner,we can see that weaker public confidence is due to a continued weakening of the renminbi,a flat-lining of China's economic growth and difficult situation on foreign trade. Some scholars note that nearly 20 years before the 12th five-year plan (2011-2015),China's potential growth rate was around 10%. At the time of the 12th five-year plan it was around 7.6% and at the time of 13th five-year plan (2016-2020) it has been around 6.2%. It is difficult for China to return to its previous growth levels through the use of fiscal or monetary stimulus or government efforts to spur innovation. Market expectations toward the currency are easily changed. For example,if the exchange rate of the renminbi against the US dollar were a very strong 4 yuan to one dollar,many people would say they were optimistic about the currency. However,if the currency fell back to 8 yuan to the dollar,people would say they were pessimistic. Public expectations decide the exchange rate rather than renminbi purchasing power.

More importantly,public expectations are affected by government pledges and government credibility. This is a learning process for the public. People tend to have more confidence in government policies if they profit from believing in exchange rate policy pronouncements. The public tends to show greater confidence if it accepts government pronouncements and then profits by doing so. Conversely,if the public accepts government statements and suffers losses as a result,there will be many more doubters of what the government has to say. Government statements on the exchange rate have shifted from the renminbi exchange rate was "nearly balanced with two-way fluctuations" to having " no base for further depreciation" to there is no "base for long-term depreciation." The varied pledge from the officials is not helpful to establish a clear and certain expectation on exchange rate.

Credibility and the Asian Crisis