Newly Liberalised Chinese Yuan Feels The Heat Of The Markets

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Chinese Credit Crunch Looming?

Newly Liberalised Chinese Yuan Feels The Heat Of The Markets

The Peoples Bank of China (PBoC) has let the Chinese Yuan fall to it’s lowest level against the US Dollar in almost a year. The Reference Rate set by the Bank was today cut to 6.1351, a 0.2% reduction. Up until this week China has allowed it’s currency fluctuate by up to 1% against the Reference Rate, this has just been extended to 2% and the market is taking full advantage. At one point this morning the Yuan was slightly over the 1% divergence before staging a recovery, a sign that the 1% level is still in the psyche of traders as the market adjusts to the new liberal Chinese currency peg.

China, the world’s second largest economy, is implementing wide ranging financial reforms. As the GDP growth target of 7.5% for this year already looks in jeopardy and the trade surplus has swung to a trade deficit, the PBoC are coming around to the notion of a weaker Yuan in order provide stimulus.

The ongoing weakening in the Chinese economy will no doubt lead to further down days for the Yuan as this currency gradually gets introduced to the open markets. Yesterday saw the initiation of Yuan trading against the New Zealand Dollar. This is a logical and long overdue move given the levels of trade between the two countries, but is also likely to open the door to a much more liberal exchange rate policy from the Chinese authorities.

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The Chinese slowdown has lead directly to falling commodity prices, particularly Industrial Metals such as Copper. There is a silver lining in this for China’s manufacturing sector. A continued fall in the value of the Yuan will no doubt provide a welcome boost to Chinese exports, but as the world’s largest importer of raw materials China remains exposed to the risks of a weak currency. Cheaper international commodity inputs will go in some way to offsetting the exchange rate pain likely to be felt by China’s industrial sector.

It is not thought likely that the PBoC will further widen the Yuan Reference Rate deviation band beyond 2% anytime soon, however a continued fall in commodity prices and an improvement in the trade balance situation may afford them some scope to do so.

To contact the reporter of this story: James Brennan at james@forexminute.com