LyrArc Article Gist
Matt O'Brien points out that the Chinese currency may be overvalued as other currencies including the euro and the Japanese yen weakened. Since 2005 China let the yuan appreciate very gradually. As China's economic growth slowed in 2014 investor outflows have increased with an estimated $800 billion leaving the country. China has spent some of its reserves to keep it stable. Before the move the yuan was managed by letting it trade up or down 2% each day around a midpoint set by the government. The new setup keeps this but lets the market set the midpoint based on where it closed the prior day. This move was recommended by the IMF to help in the transition of the yuan to becoming a reserve currency. O'Brien points out that the soft peg to the U.S. dollar means the yuan appreciated 9.2% against the euro and 57.8% against the Japanese yen in the years 2013-2015, and this is happening as the U.S. Federal Reserve is planning to raise interest rates- the real trade weighted exchange rate being up 14% for the yuan in the last 12 months. The 8.3% decline in the exports for July 2015 over the prior year led the government to this action. The increase in investor outflows as a result will lead to further declines, with some estimates of the eventual decline in the yuan at about 10%.