The currency war gets serious

This week, the Chinese yuan (or renminbi) weakened to the point where one US dollar could buy more than seven yuan. That’s the weakest level in a decade.

Chinese yuan & US dollar © iStockphotos

The "trade war has now become a currency war", says The Wall Street Journal. That "raises the potential economic harm to another level".

This week, the yuan (or renminbi), China's currency, weakened to the point where one US dollar could buy more than seven yuan. That's the weakest level in a decade and a number that has been widely viewed as a "line in the sand" that the Chinese authorities would avoid breaching. The move drew a swift response from the US Treasury, which formally branded Beijing a "currency manipulator". US officials fear that China is trying to lessen the impact of tariffs; a weaker currency makes Chinese exports cheaper overseas.

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US claims of currency manipulation come "absurdly late", says John Authers on Bloomberg. Beijing "manipulated its currency lower for many years", but of late it has been doing the opposite. Rising US interest rates and tariffs would normally drive the yuan down against the dollar. The only reason it hasn't fallen further to date is because authorities have intervened but to prop it up, not to weaken it. The dip in the currency was simply down to Beijing allowing the market to "do what it wanted to do". Nevertheless, this is a clear sign that "goodwill has been withdrawn".

While the latest fall is small in percentage terms, the breaching of the symbolic seven mark tells a bigger story, notes Gareth Leather of Capital Economics. "The government has all but given up on reaching a trade deal with the US, and is now more concerned about offsetting the damage to their economy."

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Like most commentators, I view the yuan's fall as a targeted effort by Beijing to irritate Washington, says Louis Gave of Gavekal Research. Yet we must also stay alert to a more alarming possibility. If policymakers have concluded that domestic producers could desperately do with a devaluation, then it could be a sign that all is not rosy with China's economy. If the yuan becomes structurally weaker, then in the long term, "instead of being a driver of global growth, China will be a headwind".

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