China's slowing economy has led to talk of whether the central bank should encourage the yuan to depreciate to support the struggling export sector, but analysts say this would be the wrong medicine.
"Reasons why China shouldn't let the renminbi [yuan] weaken? I can name 3.4 trillion reasons [the value of its forex reserves]," Patrick Chovanec, chief strategist at Silvercrest Asset Management wrote on Twitter on Friday.
Such a move would diminish the global buying power of Chinese consumers and hence their standard of living, Chovanec said, not helping the government's push towards rebalancing away from an export-driven to consumption-led economy.
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The yuan is a closely managed currency that is allowed to trade 1 percent either side of a midpoint set by the central bank each day.
Furthermore, a weakening of the yuan would force China to "seek refuge" in a growth model that the country has outgrown, Chovanec said.
[It would] likely trigger U.S. retaliatory sanctions that would cancel any boost to exports from a cheaper currency.
Exports in June came in well below expectations, falling 3.1 percent from a year ago, compared to forecasts for a rise of 4 percent. This was the first decline since January 2012.
Economists attributed this decline to a host of factors including sluggish external demand, the government crackdown on over-invoicing by exporters as well as the recent appreciation in the yuan.
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The yuan has appreciated 5 percent against a basket of currencies so far this year, which some analysts say have dampened the competitiveness of Chinese exports.
Junwei Sun, Beijing-based economist at HSBC, however, agreed that pushing the currency lower would be largely ineffective, particularly at a time when global demand remains weak.
"Depreciation will not be a great lift to exports, it's still demand factors that matter more," she said.
Downward Pressure on Yuan
Zhiwei Zhang, chief China economist at Nomura, argues that policymakers may not need to push the currency lower, given that it is already facing pressure from capital outflows from China driven by selling in the equity markets and jitters over the recent liquidity squeeze faced by local lenders.
The currency has weakened 0.3 percent against the U.S. dollar since touching a record high of around 6.12 in late-May.
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The yuan has been regarded by some investors as a one-way bet on the perception that it is undervalued and will be supported by China's robust growth rate. However, this view could now be challenged.
Zhang expects the yuan's deprecation trend to continue over the coming months, as investors flock to the U.S. dollar on expectations the Federal Reserve will begin scaling back its bond buying program in the second-half.