The Institute for International Trade (IIT) of the Korea International Trade Association (KITA) published a report on Oct. 5 to analyze the reasons for the current depreciation of the Chinese currency and its potential impact.

The yuan-dollar exchange rate reached 6.1710 yuan per U.S. dollar on June 3, setting a new high for this year. The sluggish indices on the real economy side and the stagnation of the housing market have added to the uncertainties of the Chinese economy, and the yuan has moved in a box pattern with great fluctuations since June.

The IIT ascribed the depreciation to the warning against hot money speculators, economic stimulus for greater exports, the Fed’s tapering, and decreased appeal of the yuan in the wake of the slowdown of the Chinese economy.

China is the largest export and import destination for Korea, accounting for a quarter of total exports from Korea. The appreciation of the won and the depreciation of the yuan in the first half of this year resulted in a 9.3 percent increase in the won-yuan exchange rate and a significant drop in Korea’s export to China between January and July. The adverse condition is likely to continue until the end of this year to affect the profitability of Korean exporters in the automobile, steel, electronics, and petrochemical sectors.

The negative impact is likely to be particularly severe in the shipbuilding, LCD, and communication device industries, where Korea and China are competing fiercely. Still, the cost burden on those companies importing steel sheets, precision chemical materials, coal, nonmetallic minerals, computers, and the like is likely to decrease to some extent because of the drop in import price.