De-pegging of YUAN

•Pegging: Maintaining the value with respect to Dollar.

•De-pegging: Increasing the flexibility in the currency policy.

Why was pegging of Yuan to Dollar done?

• To preserve jobs in manufacturing sector during the financial crisis.

History of Pegging Yuan:

• 1994: China had unified the exchange rate system and fixed the Yuan's value at about 8.6 to a dollar.

• 2001: Yuan was pegged to the dollar at about 8.277 yuan a dollar. The yuan was again revalued in 2005.

• July 2005 to July 2008: The Yuan was allowed to appreciate (steadily) by about 20 per cent against the dollar.

• July 2008: It was again re-fixed against the US currency at 6.83.

Reasons for De-pegging:

• External political atmosphere

• Hot money inflows

• Export sensitivity

• Labour competitiveness

• Real estate risk

Effects of Depegging Yuan:• Chinese economy:

▫ Exporters to be the main losers.▫ Chinese economy not to be affected much.▫ China’s Stock market: Airlines, Banks, Property,

Investment sector to benefit in short term and long term.

• World economy:▫ Balance of trade would be maintained.

What is expected to happen?

• The Spot Yuan rate expected to move in narrow daily ranges of at most 50 pips.

• Yuan can be expected to appreciate 3 percent in about six months and 5 to 6 percent in a year, in line with the progress of China's economic growth.

Bibliography:• Business world, june 2010• DNA, 24th june• Economic Times 20th june 2010 • Hindu Businessline 22 june 2010

• www.procurementleaders.com•  http://in.reuters.com/article/idINIndia-49470120100620

• http://www.bloomberg.com/news/2010-07-06/china-bashing-over-yuan-needs-a-long-rest-commentary-by-ronald-mckinnon.html 

• http://www.themalaysianinsider.com/business/article/euro-debt-crisis-opens-chance-for-yuan-depegging/