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China Just Cheapened the Yuan to Its Lowest Level in 5 Years

CHINA-NEW BANKNOTE-RELEASE (CN)CHINA-NEW BANKNOTE-RELEASE (CN)
Freely convertible?Xinhua/Li Xin via Getty Images

China’s central bankers set the yuan’s trading point at the lowest level in five years today, following the currency’s steady fall against the U.S. dollar this month.

Currencies trade in relation to one another, and the U.S. dollar has been rising on the prospect of interest rate hikes in June, so it shouldn’t be entirely surprising that the yuan, which is partially pegged to dollar’s movements, is weakening. But evidence is mounting that China wants it that way, despite earlier protests to the contrary.

The central bank today set the trading midpoint at 6.56 yuan to $1, the weakest since March 2011. The yuan’s fallen more than one percentage point against the dollar in May. Officials are allowing the currency to weaken, while preventing the yuan from dramatically declining, which would pressure capital flight from China and make it harder for the country’s corporate sector to pay off large U.S.-dollar denominated debts.

Back in August, when the yuan dropped 2% in a day and roiled global markets, the Chinese side said it was introducing a more “market-driven” approach to the currency’s trading levels. That was fiction. It was, instead, “depreciation disguised as reform,” one anonymous official was quoted saying in a Wall Street Journal story earlier this week about the central bank’s moves to return to adjusting the currency upward or downward depending on what serves the government best.

How effective depreciating the yuan is for China is up for debate. Jonathan Anderson of Emerging Advisors Group—one of the pithiest observers of China’s markets—said last year it would take a 20% to 40% decline in the yuan to have any meaningful impact on China’s exports. Back then, as today, world currencies were rising against the yuan, making it relatively more expensive, and China’s devalued a little to stay competitive.

So today’s decline, while big, is likely not consequential.

 

The yuan’s market value today remains above its January panic level and reports say traders aren’t panicking. Everything seems to be going according to the government’s plan for now, even if it isn’t the plan it told the world it was following.