Chinese Yuan May Slowdown on Lower CPI | ForexGen

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The Chinese yuan traded almost unchanged in price against the U.S. dollar today after posting a significant gain yesterday on speculations that the central bank will reduce the currency’s appreciation rate as the inflation returns to its normal values.

Yuan is the best performing currency in the Asian region this year. It managed to gain 4.2 percent in the first quarter of 2008 and another 2.3 percent in second quarter. Meanwhile stronger yuan damaged the exporters’ competitiveness on the overseas markets.

China’s strong yuan policy was caused by the two major factors — record high domestic inflation and the pressure from the European Union and the United States to revalue the yuan in order to pare the world trade imbalance. As the CPI dropped to 4.9 percent annual rate in August (lowest rate since June 2007) the inflation factor became less critical and the yuan’s appreciation may significantly slowdown.

According the currency analysts, China’s government may now switch from the inflation to the rise in unemployment and export problems. As a consequence yuan may show no further growth this year. Although the currency is believed to be seriously undervalued, it’s very unlikely that the People’s Bank of China will continue strengthening the currency without some strong stimulus.

USD/CNY currency pair rose insignificantly from 6.8381 level yesterday to to about 6.83950 as of 9:50 GMT.