A More Flexible Yuan

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Xinhua News Article

China loosened its grip on the yuan-dollar exchange rate on Saturday, widening the daily trading band to two percent from one, effective starting next Monday.

China’s currency, the yuan, started to fall against the U.S. dollar early this year after a string of appreciations in 2013. The yuan-dollar central parity rate nosedived 111 basis points on Monday, the sharpest daily decline since July 2012.

“It is widely perceived that the yuan-dollar rate is very close to its equilibrium level,” said [Ting] Lu, adding that neither trend appreciation nor trend depreciation will appear in the near term.

Wang Tao, chief China economist at UBS, agreed with Lu, saying China’s current account surplus-GDP ratio is below two percent, already lower than a widely-recognized standard that says a currency is at equilibrium when the ratio is between 2.5 and 3.5 percent.

My opinion: As far as I’m concerned, this is just more good news for the American economy.  China has been instituting policies to keep their currency strong for quite some time.  Now that it seems China’s economy is in need of some expansionary policies, we will hopefully see a little depreciation of the yuan against the dollar in the future.  China’s exports will experience upward movement and imports from China to the US will become less expensive.

I do find it interesting that the analysts are saying that they don’t predict any depreciation trend in the short-term.  With the continuing of the Fed taper and expansionary measures beginning in China, it appears to me that this would be an obvious mixture for a short- to mid-term depreciation trend.  I guess we’ll have to see how Yellen responds in the coming week to make a more accurate assessment.

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