Is Yuan going to raise?

Chinese Yuan raises again. Starting from mid-February, the dollar-Yuan exchange rate increased from below 6.06 to 6.10. I think that this change reflects the trends of Yuan and dollar in the future, Yuan will depreciate while dollar will appreciate. This changes in the exchange rate is backed by several reasons.

First, expected real estate market collapse in China. It is well known that China’s real estate market has a problem ever since 2008, the over investment leaded by the government and pushed by lots of big real-estate developers raised the price of Chinese houses rapidly and made them unaffordable to ordinary people. The demand for high-price houses is far lower than the supply, the bubble was already formed and kept increasing over time. At the end of 2013, LI Ka-shing, the richest tycoon in Hong Kong surprisingly withdraw from the Chinese property market, which is interpreted by some investors as the signal for the bubble to burst. The crashing down of the Chinese real estate market will bring China’s economy into big recession, which will lead to the dramatic depreciation of Chinese Yuan. So it is possible for international investors to quit Chinese market and waiting for the day.

Second, the tapering in US leads to capital withdrawal from developing countries and return to the US, which means more demand for dollar in US. And this will definitely appreciate dollar and make it relatively expensive compares to Chinese Yuan. The market is estimating that Fed will raise the rate in the foreseeable future, no matter what, the signal sent by the Fed will change the investors’ actions, which means the demand for US dollar will raise in the near future and this appreciates dollar in terms of Yuan. According to this WSJ article, tapering could lead to the stop of increasing in Hong Kong’s property prices. Once the prices of property in Hong Kong stop increasing, it will also change the price estimation in the China mainland, and then makes the investment in China not so promising. Eventually, investors will quit investment in China and depreciate Yuan.

And there is another reason why the raising in Yuan could be reasonable. China’s center bank is known to manipulate its exchange rate in order for Yuan to keep a relative advantage to increase the country’s export. In the past few years, China is required by US to appreciate its currency in order to inverse the trade decifit of US. However, China is always want to depreciate Yuan. According to this article in the WSJ, Chinese center bank catches the opportunity when the dollar is raising, it depreciated Yuan in order to increase export and improve the GDP.

Anyway, the market determined that dollar should raise and Yuan should be depreciated in the future, we can expect further news about this.

4 thoughts on “Is Yuan going to raise?

  1. tyuan@umich.edu'tyuan

    I agree with what you’ve talked about Yuan. Rumors say that there’s one big raise in 2014 in China. I think it should be raised a little bit due to current economic situation.

  2. davus@umich.edu'davus

    I think it will be interesting going forward to see what happens with the relationship between the Yuan and the USD. While China maybe experiencing some economic trials and tribulations at the moment, I question the sustainability for their currency controls through out the whole process. Such controls been circumvented in countries like Argentina and Egypt to decrease the effectiveness of monetary and fiscal policy. This may become one of Chinas greatest growing pains as it transitions from developing to developed nation.

  3. jhchamot

    Very interesting. I didn’t know about the expected housing bubble. There is also a lot of concern about the contracting manufacturing industry. It makes sense for the central bank to want a depreciated Yuan in order to help exports, but I wonder what the effect of a slow-down in the manufacturing sector will have on this.

  4. Emma Zhang

    I agree with the first two reasons. But I don’t think that China really want yuan to depreciate while it undergone a reform of the overall economy systems. If RMB become weaker, surely exporter will benefits, but the long term effect is that our foreign reserve will continue to hike and the inflation in China will worsen overtime. China exports should not continue rely on advantage gained from a cheaper RMB but on the competitiveness of Chinese goods.

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