China lowers yuan’s trading range but currency stabilizes

Jeannie Matthews
August 10, 2019

Stephen Moore, distinguished visiting fellow at Washington-based think tank The Heritage Foundation and a senior adviser to Trump's 2016 presidential campaign, said devaluing the yuan is a short-term strategy to neutralize the effects of US tariffs.

China allow the yuan to fall past the key 7 level on Monday, jolting global financial markets, after an escalation in US trade tensions.

Donald Trump threatened to impose punitive import tariffs on $300bn (£246.9bn) of Chinese imports last week, in a move that would effectively slap tariffs on all exports to the U.S. from the Asian country. The move, reversing its decision in May to keep China off the blacklist, came after Beijing's central bank let the yuan drop to its lowest point in 11 years.

President Donald Trump said Friday he was not ready to finalize a trade deal with Beijing and signaled he might cancel talks set for September, raising the stakes in the intensifying US-China trade war.

U.S. President Donald Trump dismissed fears of a protracted trade war with China on Tuesday, but Beijing has sent strong warnings that labeling it a currency manipulator would have severe consequences for the global financial order. "The most powerful policy tool at officials' disposal is the exchange rate, as currency weakness would directly offset much of the impact from the tariffs", said Capital Economics senior China economist Julian Evans-Pritchard in a note last week.

Trump is unlikely to back down in trade talks, Moore said, given that the relationship has been lopsided in Beijing's favor for decades.

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Analysts say a sharp drop in the yuan currency this week might offer only limited help for Chinese exporters, who are facing additional U.S. levies next month, shrinking profit margins and sputtering demand worldwide. The trading system was upgraded after the shock devaluation in August that year. Washington has accused the company of espionage and stealing intellectual property.

"Looking ahead, exports still look set to remain subdued in the coming quarters as any prop from a weaker renminbi should be overshadowed by further USA tariffs and broader external weakness", Julian Evans-Pritchard, senior China Economist at Capital Economics, said in a note yesterday.

Thank you for your feedback. Analysts had expected a slightly bigger 2.0 per cent drop after June's 1.3 per cent fall. Wall Street futures contracts indicate the Dow Jones Industrial Average could fall by more than 350 points, or 1.3%, when share trading opens in NY later on Monday.

The People's Bank of China (PBOC) set the midpoint rate CNY=PBOC at 7.0136 per dollar prior to market open, 97 pips weaker than the previous fix of 7.0039 and the weakest since April 3, 2008.

"Interest rate differential was an important factor leading the yuan depreciation against the dollar past year as yields between China and the United States shrunk sharply", he said.

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