Chinese Yuan To Fall in Coming Months
A report from Hong Kong states that the yuan is set to fall for about the next six months. The Chinese monetary authorities have signaled they will allow the fall by small amounts in order to make Chinese exports more attractive to foreigners. The China economy is heavily dependent on exports, and a strong yuan discourages sales to foreigners by making them more expensive.
China has been criticized by American and European governments last year for purposely undervaluing the yuan in order to support Chinese goods over those in the western nations. In response to this criticism the yuan was allowed to rise for some of last year and into 2008. But, as the chart below shows the last six months the yuan has fallen in dollar terms, as reflected by the Wisdom Tree Chinese Yuan Fund (CYB).
The reason they are allowing a slight fall in price now is because of the looming recession in the west which is contributing to reduced growth of China’s export industries. There have been significant plant closings and cutbacks in the region of China that hosts most of the export industry. This has led to fear of political instability.
Chinese authorities are working hard on their own stimulus package to bolster domestic income by government spending on infrastructure projects, and lowering interest rates.
Allowing the yuan to fall is in line with their other efforts to cushion the drop. Their daily limit of .5% drop or rise in dollars has been reached a couple of times, but it is expected to be honored over the period. It will simply be allowed to drop a little at a time, in keeping with the Chinese way of gradualism.
According to an article from Market Watch, Sebastien Barbe, senior economist for Asia, Calyon Credit Agricole, in Hong Kong has spoken on the issue, saying that the Chinese monetary authorities do not want the yuan to decline so much that it would ignite capital out-flows, but they do want some relief from falling exports. “From my point of view stability means no big fluctuations, it does not mean absolute stability of the currency versus the U.S. dollar,” Barbe said, adding the yuan could fall up to 6% against the dollar over the coming half year.
Because of the expected reduction in growth, export prices in China could drop some next year, giving them a little more leverage in keeping their export factories churning out products.
The yuan looks to be more of a prospect for short selling than holding a long position, at least until about midyear of 2009. At that point, the consequences will be analyzed and a new policy formulated for the balance of the year.
