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Yuan Depreciation Lashes China Investors: How To Find and Protect Profits

BEIJING (TheStreet) -- The Chinese yuan fell off a cliff last week, losing a full year's worth of appreciation against the U.S. dollar after the People's Bank of China relaxed its managed float of the currency.

If this slippage becomes a trend, a weaker yuan could help Chinese exporters sell more stuff in the United States. It also could rekindle claims in Washington that Beijing "manipulates" its currency.

In China, immediate aftershocks resulted from the central bank's action. The yuan closed Friday at 6.22 to the dollar, down from 6.14 on Monday when the policy -- a widening of the band for daily yuan trading to 2% above or below the central bank's official rate -- took effect. The band had been 1%.

The last time 6.22 yuan returned a dollar's value was in March 2013. It then marched higher. By January 2014, it only took 6.04 yuan to buy $1. The rise in the yuan's value did not go unnoticed.

One shockwave after the central bank move hit Chinese airlines that used dollars to finance recent purchases of aircraft made by Boeing (BA) and other suppliers, including China Southern (ZNH), China Eastern (CEA) and Air China.

The Chinese government's Civil Aviation Administration said the yuan's depreciation since February had effectively raised liabilities for these airlines by a combined $700 million, according to the business newspaper Yicai Daily.

What had been steady appreciation for the yuan against the dollar between June 2010 and mid-February 2014 worked in the airlines' favor, the report said, boosting their exchange-rate gains by a combined $609 million in the first half of 2013.

Currency speculators profited from a reliable drumbeat of appreciation for nearly four years. The government doesn't these like so-called "hot money" investors who inject dollars into China, and for years they've tried stopping inflows by various means.

Speculators made a lot of money on the steady appreciation that started in mid-2010, after yuan-dollar exchange rates had barely moved between 2008 and 2010. The government then started signaling that the party was over in February by letting the yuan fall slowly against the dollar for several weeks. Then came the central bank action.

In fact, though, the central bank's move may have the opposite affect and encourage speculation in the long run, according to Hong Kong-based analyst Wei Yao of Societe Generale. She argued that the daily setting of a domestic-foreign currency parity rate by the central bank will become even more useful for speculators betting on the yuan's movement.

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