The yuan’s central parity rate against the U.S. dollar hit a new low of 6.3456 on Aug. 13. The yuan has depreciated over 0.4 percent against the U.S. dollar in the past two months, and the yuan’s exchange rate against the U.S. dollar in the spot market has dropped below the psychologically important 6.38-mark many times in the past month. The offshore three-year yuan non-deliverable forward (NDF) contract traded at 6.7015 per dollar that day, equivalent to the yuan depreciating 5.6 percent.
Liu Jiming, an expert on international financial markets at China CITIC Bank, attributed the yuan’s depreciation to three factors.
First, China’s economic slowdown over the past few quarters makes overseas investors worried about a possible hard landing.
Second, China’s capital account surplus is shrinking, and the country is even facing increasing risks of capital account deficit, placing the yuan under greater depreciation pressure.
Third, the U.S. dollar is becoming stronger due to risk aversion amid the European debt crisis, thereby driving the yuan’s exchange rate down.
Analysts predict that the yuan’s spot rate against the U.S. dollar is very likely to drop below 6.4 this year.
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