2011-12-09

Yuan limit down for eighth straight day

人民币兑美元连续第8日触及跌停

Below is the chart of the renminbi today, you can see it went limit down almost immediately. The second is a poll taken by Sina on the topic. The first question asks whether you believe the renminbi will depreciate, appreciate or trade sideways. As of this snapshot at 2:30 PM Beijing time, 62.9% of the 6300 plus poll takers said depreciate, with the rest split between appreciation and sideways movement. On the second question, it asks whether the trading band should be widened. 49% say yes, 33% say no, and 18% think it needs to be studied. If you want to see an update of this poll, you can click this link: 人民币汇率连续下跌

For the record, the best explanation remains that the central bank is setting the reference point too high and letting financial institutions make arbitrage profits. One can buy 6.38 renminbi for each dollar in Hong Kong and then buy your dollar back for 6.34 renminbi in Mainland China, which is why the market keeps pushing the yuan down to the limit, currently around 6.36. One small article I saw today said that the renminbi has actually appreciated over this period because the midpoint price has appreciated. However, this is not a market price. Why would the central bank keep the yuan artificially high, or not allow traders to take it lower? I can think of two reasons. The first is political: anti-China rhetoric is heating up in the U.S. The second is market based: if the central bank believes the decline to be temporary, for political and economic reasons it would rather maintain a steady exchange rate. Allowing a quick temporary spike or drop in the yuan is exactly why the currency doesn't yet float, thus it makes sense for them to hold it steady. The risk is that they misread the market and end up defending an indefensible position. If that happens, the central bank will end up with big financial and psychological losses.

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