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

Are recession fears justified? Maybe it’s time to look on the bright side
Economy

Are recession fears justified? Maybe it’s time to look on the bright side

There's a lot to feel nervous about right now, and many people are worrying about an impending recession. But it's by no means certain, says John Step…
28 Jan 2022
No easy answers to Europe’s gas crisis
Energy

No easy answers to Europe’s gas crisis

Europe’s gas crisis is a long way from over, with some analysts thinking that gas prices could remain twice as high as normal until 2025.
28 Jan 2022
The Federal Reserve has turned inflation-fighter – how do you invest now?
US Economy

The Federal Reserve has turned inflation-fighter – how do you invest now?

The US Federal Reserve has become much more hawkish on inflation and less concerned with the markets' reaction to rising interest rates. John Stepek e…
27 Jan 2022
I wish I knew what bitcoin was, but I’m too embarrassed to ask
Too embarrassed to ask

I wish I knew what bitcoin was, but I’m too embarrassed to ask

This week, we explain just what bitcoin is – and why the cryptocurrency is so revolutionary.
25 Jan 2022

Most Popular

Shareholder capitalism: why we must return power to listed companies’ ultimate owners
Investment strategy

Shareholder capitalism: why we must return power to listed companies’ ultimate owners

Under our system of shareholder capitalism it's not fund managers, it‘s the individual investors – the company's ultimate owners – who should be telli…
24 Jan 2022
Temple Bar’s Ian Lance and Nick Purves: the essence of value investing
Investment strategy

Temple Bar’s Ian Lance and Nick Purves: the essence of value investing

Ian Lance and Nick Purves of the Temple Bar investment trust explain the essence of “value investing” – buying something for less than its intrinsic v…
14 Jan 2022
Three innovative Asian stocks to buy now
Share tips

Three innovative Asian stocks to buy now

Professional investor Fay Ren of the Cerno Pacific Fund highlights three of her favourite Asian stocks to buy now
24 Jan 2022