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Since China revalued the Yuan in July 2005, it was considered a foregone conclusion that the currency would continue appreciating at a steady clip.
The global credit crisis, generally, and the Chinese economic downturn, specifically, has turned that assumption on its head.
Last week, the RMB declined by the biggest margin since the revaluation, prompting speculation that China will adopt a currency policy diametrically opposed to that which it has pursued over the last few years.
The move also coincided with the annual China-US trade summit, attended by none other than Treasury Secretary Henry Paulson.
The new consensus among currency traders (proxied by futures contracts) is that the Yuan will depreciate slightly over the next two years, as China moves to provide a boost to its export sector.
Given that the currencies of most of China's Asian neighbors have fallen by double digits over the last year, the Yuan may have to fall sharply in order to maintain competitiveness.
The Wall Street Journal reports:
the Chinese currency hasn't experienced a large devaluation in at least a decade.
Such a move would go against the realities of geopolitics and against signals that Beijing is more focused on boosting domestic consumption than on stimulating exports.
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