A weak yuan is one of China’s tools in its trade-war strategy

A weak yuan fits well into the ongoing global move of a loose monetary policy. Chinese policymakers have also made it very easy for investors to borrow and short-sell the yuan, which indicates that they are indirectly pushing down interest rates. Despite its weakness against the U.S. dollar, Chinese authorities have not allowed the yuan to depreciate as much as against those such as its peers, including India and Indonesia.

China’s uncharacteristic ‘laissez-faire’ attitude towards its stumbling currency is spawning market speculation that the reducing price of the yuan could be part of Beijing toolkit for its economic stimulus policies.

In July, the Chinese yuan devaluated by 8% against the U.S. dollar since April 2018. This fall in 4 months, is its worst performance in its recorded history.

Much of its losses can be attributed to the escalating trade war, rising U.S. interest rates and falling Chinese yields. Latest reports from Washington suggests that Trump plans on slapping even higher tariffs on U.S. import of Chinese goods worth hundreds of billions of dollars.

Unlike in the past, such as when the Chinese yuan witnessed bouts of weaknesses from August 2015 to late 2016, the People’s Bank of China (PBOC) has hardly intervened in the forex market. Its daily fixings for the yuan, which determine the day’s trading band, have been strictly in line with moves in other currencies.

“I do think the trade war and escalating tension will mean China’s net exports will shrink and therefore the yuan will depreciate against the dollar,” said Iris Pang, a Greater China economist at ING in Hong Kong.

Pang expects the yuan to weaken to 7 per dollar by the end of 2018.

Significantly, the Chinese yuan has not fallen as steeply as it has against the greenback against currencies from its emerging market peers, including those from India and Indonesia, thus indicating that Beijing is not deliberately devaluing its currency.

“It really boils down to the question of how much will they want and how much will they allow the renminbi to depreciate,” opined Joachim Fels, global economic advisor at PIMCO, during a conference last week while adding that he didn’t think Chinese authorities had any firm thresholds for the yuan.

“I think they’re looking at the currency mainly as a tool to support economic growth. Our view is that yes, we’re likely to see further depreciation but we think it will be in a very controlled and gradual fashion.”

Market participants who suspect Beijing of using its currency as a weapon in the trade war and who have repeatedly accused China of manipulating its currency for gaining an upper hand in trade, now think it would be difficult to estimate how far the Chinese authorities will allow the yuan to depreciate.

Since Chinese imports from America are only about a fourth of the proposed $200 billion that U.S. President Donald Trump has threatened to impose on Chinese goods, a weaker yuan could well be part of Beijing’s retaliation strategy.

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