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Yuan Weakens Amid PBOC Control

(2/27/2014)

Following an extended period of appreciation, China’s currency, the yuan, has declined 1.2% against the U.S. dollar since the beginning of this year – the result of careful action by the Asian nation’s central bank, published reports suggest. While some worried the value reversal was tied to a slowing Chinese economy, it appears the People’s Bank of China (PBOC) coordinated the recent decline to ward off speculators.

A report in the Wall Street Journal, in fact, cites banking sources that confirm the PBOC guided the yuan lower by setting a weaker trading benchmark and by directing Chinese banks under state control to buy dollars. The central bank’s decision, which ends seven months of steady currency gains, is likely a precursor to the PBOC widening the yuan’s daily trading band from 1% to as much as 2%, according to analysts.

In the short-term, a weaker yuan would benefit industry suppliers who would pay less for Chinese-made products. The yuan ended at 6.1248 per dollar on Wednesday, stabilizing after nearly a week of relatively sharp declines. The yuan gained about 3% against the dollar in 2013 alone, one factor in higher sourcing costs.

A stronger yuan is viewed as a positive step for China by economists, as the nation tries to eventually transform its currency into a global rival to the dollar. Many nations argue the yuan is still significantly undervalued, giving China a trade advantage. While a less-controlled yuan is likely in 2014, the PBOC remains steadfast against allowing a free-floating currency, arguing the move would shake its capital markets.



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