2011-12-06

Yuan depreciation a blip or a trend?

PBOC Forex Purchases Drop in Oct
In mid-November, the central bank said that forex funds outstanding for China's financial institutions, including the central bank, commercial banks, trust companies and other institutions, totaled 25.49 trillion yuan, down 24.89 billion yuan from September and the first drop in four years.
Market analysts said that the data reflected the increasing willingness of financial institutions and enterprises to hold foreign currency amid the rising speculation on yuan depreciation.
This remains a blip to most of the investment world and it may well be, but it shows, again, that the yuan can go down. How big is the bearish segment of the yuan market today, and how big could it grow if there's a real economic crisis in China? They key to the equation is the Chinese themselves. The wealthy are moving abroad, the rest of the country is concerned about the property market and social mood is declining. The central bank is still mainly holding reserves in U.S. dollars, but it has been increasing euro exposure and diversifying away from U.S. dollars. Most Chinese think in terms of renminbi and dollars; if they decide they want foreign currency, they will drain dollars from the central bank's reserves and leave the euros. Ultimately, for any type of bearish yuan scenario to play out it will require a very, very strong U.S. dollar.

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