Daily Times

China’s yuan continued its steady decline on Friday, defying US President Donald Trump’s warning over the dollar’s rise and providing Beijing with a buffer against punitive trade tariffs imposed by Washington.

The yuan weakened to 6.7763 per dollar in afternoon trading, according to Bloomberg data, and is at its lowest levels in a year following a weeks-long slide as the trade conflict has heated up.

The yuan’s fall provides “a significant offset to the loss in export competitiveness for Chinese exporters due to higher US tariffs”, Rajiv Biswas, chief Asia economist with IHS Markit, told AFP.

“The (yuan’s) slide against the US dollar will substantially cushion the impact on Chinese exporters from the planned next round of US tariffs.”

The world’s two largest economies face a potential full-blown trade war after the United States earlier this month imposed 25 percent tariffs on approximately $34 billion of Chinese mechanical and technological products, sparking a tit-for-tat response from Beijing.

Washington has since threatened tariffs on another $200 billion in Chinese exports, prompting Beijing to vow further retaliation.

In excerpts of an interview with US television network CNBC aired Thursday, Trump said a strong dollar “puts us at a disadvantage”, adding that the Chinese yuan “has been dropping like a rock”.

Those and other Trump comments that criticised Federal Reserve interest rate hikes caused the dollar to fall back in the US on Thursday.

But the yuan declined further Friday as the People’s Bank of China (PBOC), which manages the currency by setting a daily trading band, weakened the central rate by the widest amount in two years.

It set a central point of 6.7671 per dollar, nearly one percent lower than the previous day’s. The yuan is allowed to move as much as two percent on either side of that point.

The yuan has fallen about 10 percent since mid-April.

Further fall expected

The yuan’s depreciation stems from a confluence of factors including the trade war, expected slower Chinese economic growth, and speculation that Beijing will take stimulus steps as a buffer, which tends to pressure a nation’s currency.

Michael Every of Rabobank said he expects the currency to move past the 7-to-1 rate, a level not seen in years.

“The PBOC, in response to a genuine deceleration in the economy to come, and to the trade war, is letting some of the air out of the balloon,” Every told AFP.

“But there is a lot of air left yet. Over two years, I’m more worried about seeing eight than seven (yuan to the dollar),” he said, adding that the Chinese currency was already considered artificially strong.

Analysts said letting it weaken costs China little — for now — while easing the impact of the tariffs.

“The central bank wants to use the currency movements to achieve internal and external economic balance. Bluntly speaking, they hope to use it to partially absorb the impact of the trade war,” said David Qu, China economist for banking group ANZ.

The dollar also has risen against a number of world currencies, fuelled in part by the Federal Reserve’s recent rate hike, which makes investing in the United States more attractive and thus tends to encourage capital to flow from overseas markets into US assets.

Published in Daily Times, July 21^st 2018.