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The yuan: a new front in the trade war?

China’s currency, the yuan (also known as the renminbi), has slumped to a new low for 201 as Trump’s tariffs put a strain on the country’s manufacturing industries.

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China's currency, the yuan (also known as the renminbi), has slumped to a new low for 2019. It weakened to 6.9352 to the dollar on Monday, getting ever closer to the psychologically important seven-to-the-dollar mark that traders think risks sparking a "currency war" with Washington. Donald Trump's tariffs are putting a strain on the country's manufacturing industries. An 8.5% year-on-year drop in imports in May also points to weakening domestic demand in the Middle Kingdom.

Those pressures caused the renminbi to fall roughly 2.5% between mid-April and mid-May. A significant devaluation could mitigate the effects of tariffs by making Chinese exports cheaper on international markets, but may provoke Trump into levelling accusations of currency manipulation.

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Until 2005, China pegged the value of its currency to the US dollar at the much weaker level of 8.3 to the dollar. Since then it has largely pursued a "managed float" system, with the central bank using its vast foreign-exchange reserves estimated at more than $3trn to limit exchange-rate volatility and buy up yuan when its value falls too far. It has not traded above seven to the dollar since 2008.

There had been a "tacit" understanding that the authorities would defend the seven-to-the-dollar level, says Christopher Beddor on Breakingviews. Yet People's Bank of China officials have begun to hint that it is not a line in the sand.

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This cautious "blurring" of the currency line is a wise move, adds Beddor. The yuan would need to depreciate another 10% fully to offset the impact on exporters of upcoming American tariffs. The central bank is "resetting expectations" while keeping just enough uncertainty about its intentions to deter currency short-sellers.

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