Yuan Watch : Measured Decline

By Chris Oliver, MarketWatch
Last update: 8:21 a.m. EST Dec. 11, 2008


Analysts say a measured decline in the yuan lasting about six months would not be out of tune with statements by senior Chinese economic leaders Wednesday calling for the yuan to remain "overall stable at a reasonable equilibrium level."
"They want to send a message that they could depreciate the currency a little bit," said Sebastien Barbe, senior economist for Asia, Calyon Credit Agricole, in Hong Kong. "They want to avoid a shock on expectations and igniting capital outflows."
References to the currency were issued Wednesday by China's top leadership at the conclusion of the three-day Central Economic Conference, a forum which usually sets the tone for economic policies in the coming year.
Analysts said currency stability was understood by the market to mean limited movement against the dollar and other leading currencies on a weekly basis. Bigger moves, they say, could spark an exodus of investment capital, copy-cat devaluation among regional neighbors, and protectionist sentiments with leading trading partners.
"From my point of view stability means no big fluctuations, it does not mean absolute stability of the currency versus the U.S. dollar," Barbe said, adding the yuan could fall up to 6% against the dollar over the coming half year.