Yuan under the spotlight - again!!

Its a tricky time for China. The global economy evidently is not performing brilliantly, and the consequences on Chinas exports and growth numbers are obvious. Last week, the countrys imports and exports showed a continuing slowdown in November 2011, indicative of a slowing sown of the worlds second-largest economy. In fact, year-on-year export growth of 13.8 percent in November-2011 was the slowest in the last nine months. Simultaneously, the country had been battling with high inflation levels - hitting a three-year high in July of 6.5 percent -, which eased in November to 4.2 percent, giving the economy some breather. With the economic trauma, talks about the Chinese currency resurfaced. The Yuan appears to be on a depreciating trajectory against the dollar, as a comment by Reuters says, "Chinas yuan has lost about half a percent of its value against the U.S. dollar, since strengthening to a record 6.335 to the greenback on Nov 14." But this time around, Chinese authorities have strong reasons to argue in favour of a depreciating Yuan. Ironically, its not the PBOC that is selling the Yuan to propel the depreciation; rather, forex traders seem to believe the currency has lost its lustre. A Wall Street Journal article said last week, "Traders have pushed the currency to the bottom of its daily trading band for seven sessions in a row, a sharp deviation from its trading patterns this year." Investors have priced in the belief that Chinese authorities will attempt to bring down the Yuan as the countrys export growth slows, despite political pressure from the US. During 2011, the red back appreciated about 3.7 percent against the dollar, and 7.4 percent since June 2010. If inflation is factored in, the Yuan has appreciated by even more than this in real terms. Market News International (MNI) - an international news reporter specifically for the global foreign exchange and fixed income markets - argued that massive short-term capital outflows are also contributing to a depreciating Yuan. Quoting the comments of a government researcher published in the official China Securities Journal on Friday, MNI stated, "The risks of depreciation caused by massive short-term capital outflows are increasing." Bearing these factors in mind, while US pressure on Chinese authorities is likely to resurface should the latter attempt to pull down the Yuan again, economic circumstances may not render it as steamed as has been seen previously.