Yuan’s Recent Weakness Done

The yuan’s recent little run of depreciation against the dollar seems to be done. Last week, the central bank allowed the biggest decline in China’s currency since ending its fixed exchange rate against the dollar in 2005. That confirmed a view forming since October among investors that Beijing was weakening the currency to help the country’s beleaguered exporters. But in the last couple of days the yuan has strengthened again and 12-month forward contracts have also risen.

Officials told visiting U.S. Treasury secretary Hank Paulson last week that the yuan will be kept stable and academic economists are being trotted out to say that government plans to spur domestic demand mean that a weak yuan policy is unlikely. Despite the recent decline the yuan is still 20% stronger than when the peg was dropped. The currency has gained more than 6% this year, but less than 0.1% in the second half.  The charitable view would be that the recent devaluation was a tap on the brakes rather than a policy U-turn.

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