Reactions to Yuan Revaluation

As the 2.1% Yuan revaluation sets in, economists and traders alike are stepping back and asking one question: what's next? The revaluation was surely momentous, but ultimately insignificant. Experts still reckon the Yuan is still undervalued by 20% - 40%. Non-deliverable forward contracts reflect collective expectations for future exchange rates. The 1 year Yuan forward contract is currently trading at 7.54 RMB/USD, indicating investors believe the Yuan will be allowed to appreciate further before year end. As a result, while China undoubtedly hoped the revaluation move would stem the flow of 'hot money' into China, it is likely to have no effect, as risk-averse investors will continue to pour money into Chinese assets and equities, confident they can earn stable returns. The Financial Times reports:

A [Chinese policy maker] said he did not think China would allow dramatic changes in the exchange rate. "The principle is stability as well as flexibility," Prof Yu said. "We don't want to encourage speculative capital inflows."

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