Recent economic indicators show that China could potentially fall into deflation later this year, as a decrease in trade from Europe starts to take effect.Wu Qing, an economist with the State Council’s Development Research Centre, issued a warning to a government newspaper, China Economic Times, that: “China has corrected its excessive monetary policy tightening in the last quarter of 2011, but the speed and effort of turning-around are not sufficient.” This will lead to deflation in the country, with a significant impact on their currency.Unless there is intervention from the People’s Bank of China, the renminbi is likely to depreciate this year. This could be a reflection of either the market forces of official action taken by the  government. Either way, it seems likely that the currency will become cheaper.Lawmakers in America and market analysts have suggested that China’s currency is undervalued anyway, and have asked president Barack Obama to raise the question with Chinese representatives.Senate Finance Committee chairman Max Baucus, a Democrat, and House of Representatives Ways and Means Committee chairman Dave Camp, a Republican, signed the letter to Mr Obama insisting that he pushed for policy changes that yield greater exchange rate flexibility. The move is to rectify trade imbalances that are supported by a reported undervalued currency in China.For more information on foreign exchange treasury services and risk management, visit our Corporate FX site