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01 13 2016 | by Victor Xing | Capital Markets

How much did the Chinese yuan actually depreciate?

Chinese yuan’s valuation vs. non-dollar currencies

The yuan’s recent devaluation is an expected response from the People’s Bank of China, with the objective of maintaining the fair value of China’s currency vs. non-dollar currencies instead of cheapening it.  Indeed, data suggest the much feared rapid depreciation has not materialized, even though this may sound counter-intuitive given the on-going news coverage on yuan’s devaluation.
  • Yuan’s “managed floating exchange rate” (think of it as a soft peg) will automatically transmit dollar strength into yuan appreciation in the absence of PBOC policy intervention in adjusting the daily yuan fixing
  • Yuan’s depreciation vs. other trading currencies has been modest
    • JP Morgan’s China Nominal Broad Effective Exchange Rate (gold line below) shows yuan’s steady appreciation vs. trading partners since the end of 2010 (that had been largely overlooked in media reports), and the upward momentum had only been stopped by two recent devaluations (August 2015 and January 2016)
      • The sharp depreciation of yuan vs. the dollar only resulted in small downward changes to the nominal yuan exchange rate, insufficient to break out the 2015 range
    • The blue line refers to Federal Reserve’s Trade Weighted Broad Dollar Index (higher refers to stronger dollar)
    • The green line is USDCNY – the index which many market participants are referencing in terms of yuan valuation (higher means cheaper CNY vs. USD)
      • USDCNY is back to 2011 levels, but the nominal yuan exchange rate is still much higher vs. 2011 levels – the difference being how much yuan has appreciated vs. non-dollar currencies
Chinese yuan's appreciation vs. non-dollar currencies
Chinese yuan’s steady appreciation vs. non-dollar currencies. Source: Bloomberg L.P.


Combining the aforementioned factors with PBOC’s public communication that the central bank would cheapen the yuan to ease “pent-up depreciation pressure,” it is reasonable to expect the gold line to mean revert as it tests the range’s upper-bound, thus, preventing it from appreciating further versus non-dollar currencies.

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