2010-01-15

Of course, the yuan might go down

The deflationary scenario that has the U.S. dollar gaining a lot of ground against other currencies would put China in a position to possibly weaken the RMB. The yuan would follow the dollar higher against other currencies and the economic situation would likely be bad for exports, meaning China would be suffering from a weak global economy and a strong currency.

China could then weaken against the U.S. dollar, but it may or may not end up weaker versus other currencies, such as the euro and yen.

Below is a report from Corriente Advisors making the case for a weaker yuan.

For myself, I prefer to see what unfolds in the markets. If I have to make a choice, right now, I would pick no change in the yuan because the U.S. dollar will appreciate, but not enough to badly damage Chinese exports. However, events change daily and anything could happen. RMB appreciation is more likely as of today, but if the markets go haywire a la 2008, then RMB depreciation becomes quite possible.

Corriente has a great presentation. To summarize it in one sentence: The People's Bank of China has inflated the RMB much more than the Federal Reserve has inflated the U.S. Dollar and the greater supply of RMB versus USD will be balanced by a decline in the value of the RMB.


H/T Zero Hedge.

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