Very recently, the Chinese yuan dropped to the lowest value the currency has reached in one year. Specifically, the currency decreased to 6.23 yuan to the US dollar on March 20. Moreover, since the beginning of 2014, this currency has fallen just over 2.5% in value.
Previously, many viewed the yuan as a safe currency to invest in as the currency increased approximately 9% in value since mid 2010. The Chinese government previously strictly controlled the value of the yuan, and not surprisingly, favorable exchange rates increased net exports. However, today, due to a more flexible government policy, the yuan can move 2% up or down a set rate on a daily basis.
Many individuals believe that this strategy from the Chinese central bank will help to put an end to the influx of “hot money” into the country. This term refers to the process where money from foreign countries with low interest rates invest in China with the goal of making a significant amount of money.
That said, many investors look at the current value of the yuan as more of a reflection of the state of the Chinese economy. After all, the economy slowed down at the beginning of the year and financial defaults are becoming a larger problem in Chinese markets. For instance, very recently the Chaori Solar Energy company in Shanghai stated that it can no longer meet its bond payments. Additionally, the largest steel company in China recently defaulted on a debt to the amount of CNY 3 billion.
In years gone by, the Chinese government would have helped these companies by either providing extensions or bailouts; however, today, the government is not likely to intervene in these types of matters. With this type of policy, the Chinese economy will most likely strengthen in the long term. However, in the short term, the Chinese yuan could depreciate further.
