UK referendum turmoil helps China to pursue stealth depreciation of its currency

The Chinese currency has depreciated to its weakest level yesterday, since September 2010. Chinese yuan weakened to 6.7164 per dollar yesterday, however, that hardly made any headlines. As the market focuses on the Europe to gauge the UK referendum damage, the yuan has been depreciating slowly. The UK referendum has made it easy for the People’s bank of China (PBoC) to run its stealth depreciation without much turmoil.

Back in August last year and in January, weakening of Yuan made headlines around the world and rocked the financial markets. At one point, speculation went so rampant, PBoC had to intervene indirectly to offshore yuan market, by pushing up interest rates close to 70 percent. That has also been one of the reasons, why yuan depreciation attracted lesser attention among traders.

However, if you look at the yuan against the dollar, you will miss out the bigger picture. Yuan has depreciated around 3 percent this year against the dollar but it is actually 7 percent if you consider CFETS RMB index, which is the value of yuan against a basket of currencies. The yuan’s depreciation is a major threat to emerging market economies as well as Europe and Japan, who are trying to recover via an increase in exports benefiting from the depreciation of their currencies.