Features

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.

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.

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.

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.

Recommended

China’s property woes are coming to a head – so what happens now?
China stockmarkets

China’s property woes are coming to a head – so what happens now?

Chinese property giant Evergrande is in big trouble. And with no bailout plan yet, markets are getting nervy. John Stepek looks at how things might go…
20 Sep 2021
The charts that matter: more pain for goldbugs
Economy

The charts that matter: more pain for goldbugs

Gold investors saw more disappointment this week as the yellow metal took a tumble. Here’s what’s happened to the charts that matter most to the globa…
18 Sep 2021
With the right political will, inflation can be defeated
Inflation

With the right political will, inflation can be defeated

Governments and central banks can easily control inflation, says Merryn Somerset Webb – they just need the will.
17 Sep 2021
Evergrande: China’s epic property bubble hisses air
Chinese economy

Evergrande: China’s epic property bubble hisses air

Evergrande, once the world’s most valuable real-estate group, is now the world's most indebted as China's epic property bubble starts to deflate.
17 Sep 2021

Most Popular

The times may be changing, but don’t change how you invest
Small cap stocks

The times may be changing, but don’t change how you invest

We are living in strange times. But the basics of investing remain the same: buy fairly-priced stocks that can provide an income. And there are few be…
13 Sep 2021
Two shipping funds to buy for steady income
Investment trusts

Two shipping funds to buy for steady income

Returns from owning ships are volatile, but these two investment trusts are trying to make the sector less risky.
7 Sep 2021
How to stop recurring subscriptions becoming a drain on your money
Personal finance

How to stop recurring subscriptions becoming a drain on your money

Tracking and pruning subscriptions isn’t as easy as it sounds. Here's how to take charge.
14 Sep 2021