According to a recent news from WSJ a sharp and sudden slide in China’s yuan is forcing investors to rethink one of the most reliable trades in financial markets over the past four years: betting on gains in the Chinese currency.
Since China resumed efforts to move the yuan higher in 2010, traders have piled into bets that profited as the currency has staged a seemingly relentless advance. But after hitting a record against the dollar in mid-January, the currency has dropped over 1%, reaching a six-month low on Tuesday.
China hasn’t intervened much in the market lately while the direction of the yuan has headed downward due to market pressures. A broad range of economic indicators—from trade to consumer spending to industrial production—have showed a slowing Chinese economy, which has reduced demand for the yuan. On April 16, China plans to report its first-quarter gross domestic product numbers and it is widely expected to show a slowdown to somewhere around 7% year-over-year, from 7.7% in the last quarter of 2013.
Most market analysts expect the yuan to reverse course over the year and finish with modest appreciation. That is because of a combination of factors: China’s economy is likely to pick up somewhat later in the year as Beijing makes moves to stimulate its economy. At the same time, its leaders realize that a steadily depreciating currency is bound to cause friction with the U.S. and other trading partners.
However, according to U.S. Treasury Looking Closely as Weaker Chinese Yuan: the U.S. put China on notice that it is looking closely at whether Beijing’s efforts to devalue the yuan represent a shift in policy that could start a round of competitive devaluations. A senior official at the Treasury Department said it would “raise serious concerns” if Beijing is moving away from plans to allow market forces to have a greater impact on the yuan’s exchange rate, especially if Chinese officials are at the same time citing greater flexibility in the currency’s movements.
Is it good for Chinese people as Yuan is falling? The answer is positive for China but negative for the United States. This is why USA doesn’t want Yuan to fall. Firstly, falling Yuan will decrease imports since the price of imports will become higher under weaker Yuan. Secondly, exports will increase due to the same reason. Thus, there will be an increase in the labor market in China since China needs to produce more. In this way, falling Yuan will definitely benefits China but hurts US economy. So will China take any actions because of the warning from U.S.? Let’s wait and just keep an eye on the exchange market.