Will Yuan Depreciate against USD?

As the Chinese currency yuan or renminbi  appreciated all over 2 years and those buying from China directly felt the rising costs of purchases since the stronger Yuan made the Chinese exports more expensive.

Nearly, for the last 6 months, the currency rate is stabilized at 6.80’s level. However, as the global crisis hit the Chinese economy, there is now the possibility for Yuan’s depreciation. But it is actually very hard because as the rest of the world have deep problems, a China making exports cheaper could or would give way to protectionist reactions against Chinese imports, especially in USA and EU.

Here is Shanghai Daily news about the debate over the depreciation:

ECONOMISTS are divided on the yuan’s movement next year.

Liao Qun, CITIC Ka Wah Bank chief economist, said yesterday he expects the yuan to appreciate 2 percent to 4 percent next year, a “moderate appreciation.” “From a mid and long-term view, the trend of yuan appreciation is irreversible as China continues to integrate with the global economy,” Liao said.

The currency has appreciated 6 percent this year against the United States dollar in the first half with its momentum on hold in the second half after a moderate depreciation in recent weeks.

The People’s Bank of China has said that it will stabilize the local currency and doesn’t rule out depreciation of the yuan.

Liao said he expected the foreign currency to re-emerge as a hot issue when President-elect Barack Obama takes office in January.

“A weaker yuan can help Chinese exporters. However, the question is that when the external demand is shrinking, a relatively cheaper price won’t make big difference,” Liao said. “Only if the yuan depreciated by 20 percent, which is unlikely, can there be a big help for exports. If not, a mild depreciation of the yuan won’t give actual significant help to exporters.”

Lu Zhengwei, Industrial Bank chief economist, had a different view and said depreciation of 10 percent next year would help exports.

“It may be the best timing for the yuan to depreciate since 2002 against the backdrop of the current financial crisis,” said Lu. “Why should China continue to keep its currency up when currencies of other emerging markets are depreciating?”

A depreciated yuan, together with tax rebates, would help exports a lot, he said. “Depreciation is part of a more flexible foreign currency control,” Lu said.

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