As the yuan plumbs new lows against the dollar, China's currencyis still strengthening against its peers.

That's posing a dilemma for the nation's policy makers as theyseek to arrest a plunge in exports and shore up an economy growingat its slowest pace since 1990. China's exchange rate climbed 0.6%against a trade-weighted basket last week, its biggest advance inthree months, even as it slumped 0.8% versus the greenback to asix-year low. Against the euro and the South Korean won, the yuangained at least 0.7%.

With the latest data showing Chinese outbound shipments sank 10%last month from a year earlier, the case for a weaker currency isgrowing. The quandary for policy makers is how to allow a quickerpace of depreciation against the dollar without sparking the sizeof capital outflows that occurred in January this year and August2015.

“Given the current strong U.S. dollar environment, it would bedifficult to see the basket weaken,” said Perry Kojodjojo, astrategist at Deutsche Bank in Hong Kong. “At the end of the day,if you want exports to be more competitive because of yourcurrency, then you need the currency to be weak, but the problem isthat would create systemic risks, which the PBOC authorities wouldlikely feel uncomfortable with.”

Chinese policy makers had it easier earlier in the year, whenfading bets for higher U.S. interest rates spurred a weaker dollar.By allowing the yuan to rise less against the greenback than itspeers, the CFETS RMB Index of 13 trade partners' currenciesfell steadily without causing alarm. While the gauge is still down6.2% this year, it's remained above its two-year low of around 94since Aug. 23.

The risks of a faster depreciation were laid bare in August lastyear, when policy makers unexpectedly devalued the currency. Aftera more than 50% surge in the real effective exchange rate over thepast decade, there was a compelling case to weaken the yuan. Theresult, however, was panic across global markets and record capitaloutflows, which prompted the government to deplete itsforeign-exchange reserves to stabilize the exchange rate andtighten controls on outflows.

The yuan fell 0.2% to 6.73 per dollar at 5:01 p.m. in Shanghai,while dropping 0.1% against the trade-weighted index.

Fiona Lim, a senior currency strategist at Malayan Banking Bhd.in Singapore, says 94 could be the currency basket's low for now,with a slowdown in exports in other countries suggesting a weakeryuan may not be of much help.

“Exports remained sub-par for China and for most other parts ofthe world,” she said. “Hence, the benefits of depreciating the yuanon a trade-weighted basis is small and would be largely outweighedby a potential rise in capital outflows should markets expect theyuan to weaken substantially.”

Still, the slide in exports will add to pressure for policymakers to allow quicker depreciation, said Deutsche'sKojodjojo.

“Given the weaker data, China is likely to try to correct someof the renminbi over-valuation,” he said, using an alternative namefor the currency.

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