2010-05-24

Weaker yuan argument reaching wider audience

Here's CNN Money: Chinese yuan: overvalued or undervalued currency?
"I think it's pretty clear that [Chinese leaders] are backing away from it," said John Makin, a principal at Caxton Associates and an expert in international finance. "They're very nervous about what's happening in Europe."

Makin questions the assumption that the yuan would float higher if allowed to trade more freely, given the turmoil in global financial and currency markets.

"If they let the yuan trade freely, a month from now it might be down rather than up. The world situation is changing pretty rapidly," he said. "It's no longer clear there's an unambiguous case for the yuan to appreciate."

Ashraf Laidi, chief market strategist for CMC Markets, said he believes the yuan is still probably 7% to 10% overvalued versus the dollar, but agreed that if it were freely traded, it would be difficult to predict which direction it would move.

"We don't know how much speculative interest there would be in the yuan," he said. "There might be some dynamics out there that would cause the yuan to go down, behaving like other high-yielding currencies, because people would be fleeing it."
If Chinese wanted to weaken the renminbi, they could increase their reserves of euros, which are likely to remain weak and decline further in the coming weeks and months. This would have the effect of the renminbi absorbing some of the slide in the euro, reducing the slide relative to RMB and reducing the value of RMB relative to the U.S. dollar.

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