China Is Closing In On A Major Turning Point: It May Weaken Its Currency Against The Dollar

In one of the starkest signs that China could let its currency depreciate against the U.S. dollar, state-owned China Securities Journal (via The Financial Times) has said the country needs a weaker currency to make-up for the slowdown in the global economy.  

Take a step back to realise how big of a deal this potentially is: We’re used to China steadily strengthening its own currency, a process that US law makers say hasn’t happened fast enough.

Some crucial reforms, like the People’s Bank of China decision to widen the renminbi’s trading band against the U.S. dollar to 1 per cent had suggested that China was letting the renminbi appreciate in the long-term.

Late last month, the IMF released a report saying the yuan is only “moderately undervalued” to the U.S. dollar. It also added that currency appreciation would be necessary to develop the Chinese economy.

If the renminbi were to further depreciate against the dollar, it would certainly give presidential hopeful Mitt Romney another talking point, since he had famously said he would label China a currency manipulator from his first day in office. 

Via the FT, here are the key quotes from the China Securities Journal:

“The opinion that the renminbi has entered a period of depreciation has now gradually been accepted,” the newspaper said.

“Although expectations of renminbi deprecation could spark some short-term capital outflows, they will be beneficial by enhancing exports,” it added.

This chart from Yahoo Finance shows that the yuan has already weakened against the dollar this year (but within the pre-established band).

CNYUSD

Photo: YahooFinance

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