China allows the yuan to depreciate against the dollar

Facing the economic slowdown, China’s central bank plays the game with a weak yuan to gain competitiveness.

China’s central bank changes its tune. After fostering appreciation of the yuan against the dollar over the past two years, the institution is now playing the game to a weakening of its currency against the greenback to gain competitiveness on the export front.

Yesterday, the yuan has hit its lowest level against the dollar since the beginning of the year. Since January, the Yuan has dropped about 1.4% against the U.S. dollar, while it had appreciated by nearly 4.7% in 2011. “The renminbi has entered a phase of unprecedented depreciation against the dollar since late May”, stressed analysts in a recent note.

“The Chinese are pragmatic. They have realized the significant slowdown in Chinese activity and have thus ceased to support the movement of the yuan. China had the same attitude in 2008 when the subprime crisis had worsened, “said Jean-Louis Mourier, economist at Aurel BGC.