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China tightens controls to slow currency’s fall

Updated August 07, 2018

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Beijing: People walk by a mural displaying world currency symbols on display outside a bank here on Monday.—AP
Beijing: People walk by a mural displaying world currency symbols on display outside a bank here on Monday.—AP

BEIJING: China has tightened controls on trading in its yuan to discourage speculators after a decline against the dollar amid a tariff dispute with Washington fueled fears of a damaging outflow of capital from the world’s second-largest economy.

Traders must post a 20 per cent deposit starting Monday for contracts to buy or sell yuan on a future date. That raises the cost of betting it will drop and might help to discourage speculative trading. The tightly controlled yuan has been allowed to decline by about 8pc against the dollar since early February.

That helps Chinese exporters that face US tariff hikes by lowering their prices in dollar terms. But it also encourages investors to shift money out of China, which would have a broader impact by raising financing costs for other industries.

On Friday, the yuan slipped to a 13-month low of 6.91 to the dollar, close to the highly symbolic level of 7, before strengthening to 6.83 after the margin re­­quirement was announced.

The deepening US- Chinese tariff fight prom­pted suggestions Beijing might weaken the yuan to help exporters. But analysts say the decline has been driven mostly by China’s slowing economic growth and the diverging direction of US and Chinese interest rates.

Washington imposed 25pc tariffs on $34 billion of Chinese goods on July 6 and is considering an increase on an additional $16bn, with another $200bn list of goods threatened. Beijing matched Washington’s first round of increases and on Friday threatened penalty charges on another $60bn of US imports.

Communist leaders have tried to stick to long-term economic plans, resisting US President Donald Trump’s demands to change industry development strategies Washington and other governments say violate their market-opening commitments.

That business-as-usual approach has included the People’s Bank of China allowing the yuan to fluctuate more widely. Beijing wants to make the exchange system more market-oriented and efficient.

The central bank “had been largely tolerant” of the yuan’s decline, said Jingyi Pan in a report. But the latest changes “may have gathered concerns including capital flight.” The margin of decline against the dollar has been unusually wide because other currencies in the basket used by the Chinese central bank to set exchange rates have not risen along with the greenback.

Compared with the overall basket, the yuan has declined by a smaller margin of 4pc, according to Carl B. Weinberg of High-Frequency Economics.

Beijing imposed similar controls in October 2015 after a change in the exchange rate mechanism prompted markets to bet the yuan would fall, according to Philip Wee and Eugene Leow of DBS Group. The currency temporarily steadied but fell further the following year.

Published in Dawn, August 7th, 2018