The curious case of China's falling yuan

A 100-yuan banknote against the background of a US dollar sign China's central bank is probably reminding traders that the yuan is not a one-way bet

The Chinese currency has had its biggest one-day fall, down nearly 1%, and has fallen 1.5% for the past week and a half. It is the biggest decline since 2005 when it introduced its new currency regime and moved away from a tight peg against the US dollar.

Dropping to 6.1 yuan to the dollar, the currency has broken a long-term trend of appreciation. Recall that it had been around 8 yuan to the dollar in 1994 when the exchange rate was set up.

The Chinese central bank, the People's Bank of China (PBOC), is right in that these are not big moves in the foreign exchange market. In a statement, the PBOC says this volatility is normal for other economies so there's "no need to over-interpret it."

But since the Chinese currency is controlled by the central bank to move within a narrow band of 1% around a daily fix and isn't convertible, the breaking of a steady trend will be viewed as a signal.

So what is the central bank signalling? Probably that the yuan isn't a one-way bet, meaning that the currency can fall as well as rise. It matters in that if traders expect the currency to always rise, then they will increase demand for the yuan that produces the intended effect.

As China wants to control the pace of appreciation, it ends up having to intervene to buy dollars and there's not a huge appetite to buy even more dollars as China holds rather a lot already.

Long-run value

There's also appreciation pressure from the demand for yuan as capital continues to flow into China, despite slowing growth, or perhaps because of it, since investors seem to like steadier and more balanced growth.

By demonstrating, or rather orchestrating, that the currency can fall as well as rise, the central bank is trying to show the currency isn't a one-way bet, since that can be self-fulfilling.

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Reading the tea leaves, a bit of volatility is likely what the Chinese central bank is after”

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The central bank may also see the yuan as being close to its equilibrium value, so there shouldn't be too much upward pressure or the currency could end up being over-valued and that would hurt exports.

Of course, it's not possible to say what the long-run value is due to a number of reasons; China has no market-clearing interest rate (it has several benchmark lending and deposit rates), the currency isn't tradable across China's borders, and inflation isn't well-measured.

So it's difficult to make what economists call purchasing power parity (PPP) estimations, that essentially says that goods should eventually cost the same across countries, so exchange rates offset pricing differences. Well, that's hard to work out for most countries which is why the short-run exchange rate can be volatile.

Reading the tea leaves, a bit of volatility is probably what the Chinese central bank is after. The internationalisation of the yuan is underway where the Chinese currency is now traded in offshore hubs such as London.

According to the global transaction services organisation, SWIFT, the yuan is already the seventh most-traded currency in the world, after the highly liquid top six currencies, rising quickly in just a couple of years. And this is without it being tradable or convertible.

So the exchange rate reforms are gaining speed. The PBOC has a plan to allow the currency to be liberalised within the decade, and the Shanghai free trade zone is experimenting with allowing the yuan to be traded.

Steady rise

For these reforms to work, they wouldn't want speculators to push up the value of the currency, so the PBOC is flexing its muscles to show that it is in control and what it wants is for the currency to move up as well as down.

It is hard to bet against a central bank - whether it's the Chinese or the Swiss. But for now, most economists still expect that the yuan will continue its steady rise as the economy continues to grow.

The PBOC could find that it is working against the fundamentals of the economy so it probably won't try and depreciate the currency by much, but it is well able to intervene and make it move up and down on a daily basis.

Linda Yueh Article written by Linda Yueh Linda Yueh Chief business correspondent

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  • rate this

    Comment number 47.

    Chinese government was buying US Dollars so it kept their currency low and therefore their exports were cheap and imports expensive.

    It was done to increase internal manufacturing. They have done this for 10+ years.

    The Chinese have a tremendous supply of low cost worforce with no health and safety regualtion to worry about so no wonder they are killing the "developed" world's manufacturing.

  • rate this

    Comment number 46.

    41. nametheguilty
    Agree with you. They build cities with no people, houses no one can afford, roads with no cars, airports with no planes.

    The world no longer wants its increasingly expensive mass produced tat. They have a huge demographic problem and furthermore since the official Chinese figures are undoubtedly fiddled it may well be much worse there than anyone yet knows.

  • rate this

    Comment number 45.

    @41. nametheguilty
    "China is a basket case. They have made exactly the same mistake as the US and UK, and earlier in Japan, in allowing a debt fuelled property boom get out of hand."

    That they have. However it's countered by the amount of foreign debt they've bought/are owed. They've offset a housing boom/bust with hedging in other countries' debts. It's not as if nobody owes them a bob or two.

  • rate this

    Comment number 44.

    @28. Christopher Evans
    "UK is not yet (legally at least) a colony of the UK"


    "So why is the RMB-USD exchange rate used in this article?"

    One is, for better or worse, a global reserve currency. The other is the currency in which a not insignificant of manufactured products are primarily traded before the open market.

    So why not?

  • rate this

    Comment number 43.

    Effort appreciated for understanding (mechanism & motive) in 'control' & 'playing' of currency markets, in too limited sense 'ours'. As from one of Ernie's plays (all the right words) we are left with Sir Algernon @33 (poker (&) tax a back-up) & as Knut implies @29, need to recruit those with 'solid experience' to work for the human race, only possible with universally agreed equal partnership.

  • rate this

    Comment number 42.

    The curious case of the arbitrary thread selection by an increasingly eccentric, not to mention inept Beeb HYS team - lots of news around but Saturday is a day off?

    #33 I'm with Algie on this one.

  • rate this

    Comment number 41.

    China is a basket case. They have made exactly the same mistake as the US and UK, and earlier in Japan, in allowing a debt fuelled property boom get out of hand.

    Chickens will be coming home to roost in due course. The likely way out will be printing money to inflate the debts away - and consequently the value of the currency will drop.

  • rate this

    Comment number 40.

    As China is increasing reliant on exports it is understandable that they would not want the yuan to rise too much. China does need to buy lots of raw materials and so a strong yuan would be good. But the need for raw materials is driven by their exports so in the long term a strong yuan could harm the economy.

  • rate this

    Comment number 39.

    The race to the bottom continues apace.

    Sand in the face of those western manufacturers who tightened their belts to stave off Chinese competition. Well they had better tighten their belts even more. And things will only get worse for them.

    As will conditions for oil exporting countries serving China,

    They will get paid less. Watch out Sudan etc.

    Will China catch a cold?

  • rate this

    Comment number 38.

    This is a stark reminder to investors that just like the collapsing Japanese Yen, China and these other far away countries can sharply manipulate the value of their currencies without seeming to appreciate what the side effects will be - an invevitable loss of confidence

  • rate this

    Comment number 37.

    20 years ago no-one really gave hoot about China,
    now they {China} can't buy American Dollars anymore because if they buy any more they will actually OWN America!

    Bought anything Made In China recently. Then it's YOUR FAULT

  • rate this

    Comment number 36.

    At least the Chinese bankers have to do what they are told. They are not allowed to do a Fred Goodwin or a Goldman Sachs and bleed everyone else dry, whilst at the same time, being given public money to keep their bonuses when they have ruined the economy.

  • rate this

    Comment number 35.

    The Chinese manipulate their currency, manipulate economic and financial information and manipulate freedom of information, while at the same time turning a blind eye to intellectual property theft and counterfeit goods. We in the West have allowed ourselves to grow fat and lazy on debt fuelled welfare systems, paid for by Chinese credit - we are in hock to them and only have ourselves to blame

  • rate this

    Comment number 34.

    There was a young lady named Driscoll
    An expert on all matters fiscal
    This started just fine
    But now it won't rhyme
    So I'll do something else instead.

  • rate this

    Comment number 33.

    More and more the world's monetary systems are beginning to look like a game of poker. Governments are to blame. They use our tax as back up money for these speculators. We must start using taxpayers money on new infrastructure, housing , transport and flood defence. Use the money to help the people who pay it. No to bankroll the last roll of the dice for charlatans.

  • rate this

    Comment number 32.


    When are the WTO & it's members going to stop pandering to China's currency manipulation...???

    Oh, they're not are they....

    ....they can't because when the financial wild west that Thatcher & Reagan's deregulations unleashed the world economy went for a burton....

    ....& it was mostly China that bailed us all out....

    ...we owe them too much money to call the shots...

  • rate this

    Comment number 31.

    Once again this devaluation demonstrates China is a command economy under the control of the Chinese Communist state. The Chinese Communists since 1981 has rejected the free market system & the welfare state. China continues to keep most vital statistics and true figures about its economic, financial & business activities as state secrets. The West and Taiwan should boycott China now!

  • rate this

    Comment number 30.

    China would like to push the USD off its pedestal as the reserve currency and replace it with the Yuan. If this were to happen America would be in serious trouble when the next round of debt restructure had to be carried out. Not only America but also the rest of the Western world would suffer the consequences. World FIAT currencies would be worthless overnight and banks would close their doors.

  • rate this

    Comment number 29.

    I'm not sure you can just look at just two currencies in isolation and do much more than go round in circles selectively dredging up what happened nearly ten years ago and fantasizing about the future.

    It needs specialist opinion from someone who has solid experience of Currency exchange.

    But hey, who needs experts when we've got Journalists & laypeople like myself who know everything.

  • rate this

    Comment number 28.

    This is the web-site of a British institution, most of its users are British, GBP-RMB exchange rates are published on the internet, and the UK is not yet (legally at least) a colony of the UK. So why is the RMB-USD exchange rate used in this article?


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