China is letting the yuan weaken against almost all major currencies as a deepening trade war with the US threatens to deal a blow to its already teetering economy.
The onshore yuan dropped to levels last seen during the global financial crisis against the dollar on Thursday, before paring the move with China’s top leaders set to meet on economic stimulus. The yuan also fell to a 15-month low against a basket of its trading partners’ currencies.
Bearish yuan wagers have grown as the People’s Bank of China weakened its reference rate for the currency for a sixth straight session on Thursday, albeit at a measured pace, signaling Beijing’s desire to gradually weaken the managed currency to bolster exports. The fixing rate limits the yuan’s onshore trading to a 2% range on either side.
It is reasonable for China to adopt a strategy of gradually weakening the yuan fixing, Ju Wang, head of greater China FX and rates strategy at BNP Paribas SA said. “This would ensure the yuan to steadily underperform the basket, an effective and not-so-disruptive way of handling the tariffs.”
China may be turning its focus on exports to other trading partners, with its trade war with the US showing no signs of ending. The latest installment of the trade crisis saw President Donald Trump raise duties on China to 125%, even as he announced a 90-day pause on tariffs for dozens of trade partners. That’s after Beijing imposed 84% levies on all US imports as it vowed to “fight till the end” against US levies.
“The PBOC kept the dollar-yuan fixing steady to anchor sentiment, while weakening yuan basket index to improve China export competitiveness against the non-US trading partners,” said Ken Cheung, chief Asia FX strategist at Mizuho Bank Ltd. “It appears that the sweeping US tariffs should have suspended China-US trade to a large extent and China will focus on driving yuan basket lower.”
So far, China has stopped short of delivering an aggressive devaluation of the currency that some had speculated as a sharply weaker yuan carries a high cost despite its potential support for exports. It can hurt confidence toward Chinese assets and further agonize the US, with Trump already accusing China of manipulating its currency to offset tariffs.
“A large yuan depreciation would be too unsettling for markets and China’s trading partners, and we do not see that outcome as likely,” said Wei Liang Chang, a strategist with DBS Bank Ltd. “China could see a need to maintain goodwill with trading partners, amid an increasingly fragmented global trading system.”
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