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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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.
-
Is the Office for National Statistics in turmoil?Britain’s statistics authority, the Office for National Statistics, is increasingly unfit for purpose. Why, and what can be done?
-
Saba Capital and Boaz Weinstein respond to investment trustsAs investment trust managers and industry experts accuse Saba of self-motivated opportunism, the hedge fund responds to specific "misleading claims" and sets out its stall
