China's yuan falls to 2019 low after Trump tariff threat

Published August 2, 2019
In this July 20, 2018, file photo, a deliveryman for American-based pizza chain Domino's prepares to make a delivery near a mural displaying Chinese yuan and other world currency symbols on the outside of a bank in Beijing. — AP
In this July 20, 2018, file photo, a deliveryman for American-based pizza chain Domino's prepares to make a delivery near a mural displaying Chinese yuan and other world currency symbols on the outside of a bank in Beijing. — AP

China's yuan fell on Friday to its lowest level this year against the dollar following United States President Donald Trump's threat of new tariffs on Chinese goods, coming close to breaking the politically sensitive level of seven to the US currency.

The yuan tumbled to 6.9520 to the dollar, its lowest level since December, but recovered slightly by midday.

The currency's weakness is helping to fuel Washington's trade complaints. The US Treasury Department declined in May to label China a currency manipulator but said it was closely watching Beijing.

Trump's tariff hikes in a fight over China's trade surplus and technology ambitions have put downward pressure on the yuan by fuelling fears economic growth might weaken.

Chinese leaders have promised to avoid “competitive devaluation” to boost exports by making them less expensive abroad. But regulators are trying to make the state-controlled exchange rate more responsive to market forces, which are pushing the yuan lower.

The level of seven yuan to the dollar has no economic significance, but could revive US attention to the exchange rate.

“The Chinese yuan can push above its 6.85-6.90 range towards 7,” said Philip Wee and Eugene Leow of DBS Group in a report. “The latest tariff threat will add to China slowdown worries, which markets believe can only be assuaged by a trade deal.”

The yuan, also known as the renminbi, or “people's money,” has lost 4 per cent since hitting a high in February of 6.6862 to the dollar.

That helps exporters cope with tariffs of up to 25pc imposed by Trump on billions of dollars of Chinese goods. But it raises the risk of inflaming American complaints.

Trump rattled financial markets on Thursday by announcing plans for 10pc tariffs on $300 billion of Chinese goods, effective Sept 1. That would extend penalty duties to almost all US imports from China.

“The new tariff escalation will likely put more depreciation pressure on the CNY,” said Tao Wang of UBS in a report.

Still, she said Beijing is likely to “tightly manage” the exchange rate “to avoid any significant depreciation". China's central bank sets the yuan's exchange rate each morning and allows it to fluctuate by 2pc against the dollar during the day. The central bank can buy or sell currency or order Chinese commercial banks to do so to dampen price movements.

The Treasury report in May said US authorities believe direct central bank intervention this year “has been limited". However, it urged Beijing to “take the necessary steps to avoid a persistently weak currency".

China is, along with Germany, Japan and South Korea, on a list of trading partners that “merit close attention to their currency practices”, the report said.

A weaker yuan also might disrupt Chinese efforts to shore up weakening economic growth by encouraging an outflow of capital from the world's second-largest economy. That would raise borrowing costs.

The central bank tried to discourage speculation last August by imposing a requirement that traders post deposits for contracts to buy or sell yuan. That allows trading to continue but raises the cost.

Beijing imposed similar controls in October 2015 after a change in the exchange rate mechanism prompted markets to bet the yuan would fall. The currency temporarily steadied but fell the following year.

The People's Bank of China is unlikely to weaken the yuan intentionally “because Beijing will not want to inadvertently jeopardize macro and capital market stability”, said Vishnu Varathan of Mizuho Bank in a report.

Opinion

Poisoning minds
23 Jan 2021

Poisoning minds

ICS cadets were raised on James Mill’s notorious work.
The fog of Broadsheet
23 Jan 2021

The fog of Broadsheet

How can the government pump credibility into an official probe when it has already declared its own political verdict?
Cheating on online exams
23 Jan 2021

Cheating on online exams

The difficulty of preventing online cheating and low ethical standards means that these days most students cheat.
Language mess
Updated 22 Jan 2021

Language mess

Our policy confuses the medium-of-instruction debate with the language-acquisition debate.

Editorial

23 Jan 2021

Power price hike

ALREADY struggling to cope with the impact of the Covid-19 pandemic and rising food prices, consumers received yet...
Updated 23 Jan 2021

Israeli land grab

WITH the chapter now closed on the Trump presidency, the eyes of many in the international community — ...
23 Jan 2021

New PhD policy

EARLIER in the week, the HEC chairman announced several changes for undergraduate and PhD degrees in the country....
Updated 22 Jan 2021

Time to heal

A multitude of foreign issues will test Biden’s mettle and require progressive thinking.
22 Jan 2021

Foreign funding

AS the pressure builds on his party in the foreign funding case, Prime Minister Imran Khan has called for an ...
22 Jan 2021

Decaying PTV

THE Cabinet Committee on State-Owned Enterprises has decided to remove Pakistan Television from the list of...