Hi
I’m confused about whether the shift from US$: RMB(Yuan) e.g… 1: 7.8 in 2007 to 1: 6.1 in 2014 represents an appreciation(strengthening) or a depreciation of the RMB (Yuan).
I look forward to your feedback
davidmich
Break the problem into pieces.
What is the exchange rate? Answer: It is how many RMBs you need to get yoself one buck. In 2007, it was a whole bunch of RMBs. It was 7.8 RMBs. Look at all of them! And now in 2014? You only need 6.1 RMBs to get the same dollar. That means that the RMB has strengthened. It takes fewer of them to get one dollar. Think about it and you’ll see the pattern will hold when you compare X of anything against 1 dollar. If X is going down, then the value of X is strengthening because it takes less of X to get the dollar. If it’s going up, then that means it’s weakening because it takes a whole lot more X to get the same one dollar.
And we can see the same thing in reverse, when we’re dealing with regular prices. In that case, you’re comparing (say) a fixed one gallon of milk versus a fluctuating amount of dollars. If the amount of dollars it takes to buy that single gallon of milk is going up, that means the dollar is weaker compared to the milk. It takes more dollars to get the same fixed amount of milk. The weird trick with foreign exchange is that you’re often holding the dollar constant and varying the item, rather than holding the item constant and varying the dollar. But the idea remains the same either way you approach the problem. If you’re comparing 1 of something, versus a fluctuating number of the other thing, then when the fluctuating number is going down then the value of the fluctuating thing is strengthening relative to the constant unit.
Thanks Hellestal. What confused then was this article " Yuan slide might be ‘end of an era’
“The currency has fallen repeatedly in the past two weeks. Many dealers said the depreciation is a deliberate move by the PBOC to target speculative funds betting on continued rises.”
So a depreciation against the dollar would mean an exchange rate shifting from say : 1:612 to 1:6.1550 for example. Would that be correct?
davidmich
Well, your numbers are not quite accurate for the situation. The yuan has slid down in value, from 6.05 in January to 6.15 recently. Holding the dollar constant, the RMB number is going up, so their currency is clearly weakening.
If we compared a constant 1 RMB against a fluctuating number of dollars, then the phrase “Yuan slide” would make more intuitive sense to the general public. But people who make their business in foreign exchange don’t need to be mollycoddled like that.
Thanks Hellestal. That makes sense now.
davidmich
The rmb was pegged at rmb8.3 = usd1 for a long time. The rmb has strengthened vis a vis the dollar for years. The strengthening has been within a daily fluctuation band and has been pretty one way. One way as is strengthening vis a vis the dollar.
Recent 2 weeks or so, it appears the people’s bank of china (Chinese equivalent to the fed) has intervened in the currency market to weaken the rmb to mess with currency speculators. In other words, burned speculators that were getting overly cocky making one way bets the Yuan would weaken. No government likes speculators, the Yuan is not freely convertible and china has massive forex and can easily burn speculator fingers.
Yuan is a different name for rmb