Depreciating the Yuan

The Chairman Maos aren't worth as much as they used to be...

The value of the Chinese yuan dropped for the second day in a row, following a 1.9 percent drop yesterday, and 1 percent today, making it the biggest two-day fall since 2005 when the yuan was unpegged from the US dollar and moved to be valued against a "basket of currencies".

In Hong Kong this meant that yuan deposits fell by a staggering HK$32.6 billion in a book value of 1 trillion yuan deposits.

However the chief economist of China's central bank, Ma Jun, said there was no need to worry.

"Based on fundamentals, our key economic data all supported a stable yuan," said Ma, of the People's Bank of China, in a commentary in the People's Daily. "China's economic fundamentals obviously fare much better than those economies which face huge pressure to devalue their currencies."

But perhaps the sudden move is to help jump start the country's export markets, particularly car and textile companies to become more competitive, and people buying Chinese goods abroad will find the prices cheaper. Tourists traveling to the Middle Kingdom will find the cost cheaper too.

Nevertheless, this does not bode well (if this drop continues) for those companies exporting to China, particularly luxury goods, as the Chinese will find them even more expensive, while domestic companies that have foreign currency debt will feel the pinch having to pay in dollars.

We will have to see what the fallout is, and how long it is sustained, but everyone gets nervous when China suddenly changes tack without much explanation. If this move is to spur the country's economy, it's a big risk the PBOC is taking...