China’s yuan exchange rate set to post largest monthly decline since 1994

02-Sep-2019 Intellasia | South China Morning Post | 6:02 AM Print This Post

China’s yuan exchange rate is set to post its largest monthly decline in more than 25 years, as the Chinese government let the partially convertible currency depreciate in response to higher US trade tariffs and a weakening export outlook.

The yuan is on course to record a 3.8 per cent drop against the US dollar in August, marking the biggest monthly decrease since January 1994, when China completed a major overhaul of its currency regime by unifying its dual exchange rates.

The yuan is the worst performer in August among Asia’s 11 most-traded currencies after India’s rupee, which fell 3.9 per cent this month.

Many brokers have cut their forecasts for the yuan this year, because Chinese authorities are expected to reduce their support for the value of the currency to help offset the impact of increases in US tariffs given China’s weakening export and economic outlook.

“The trade tensions are a major reason for the yuan to depreciate because it hurts the global economy – and China’s current account balance,” said Jimmy Zhu, chief strategist at Fullerton Markets. “On the other hand, the dollar is being propped up against other currencies when their central banks ease policies.”

Standard Chartered Bank downgraded its yuan forecast to 7.23 per dollar by the end of this year from an estimate of 6.86. ANZ Bank and ING Bank lowered their yuan predictions to 7.20 by the year-end compared to earlier forecasts of 6.92 and 7.10 respectively.

Bank of America Merrill Lynch was more pessimistic, expecting the yuan to reach 7.50 at the end of the year from a forecast of 7.30.

China could depreciate yuan further if trade war escalates, IMF says, rebuking currency manipulator charge

Earlier in the month, the People’s Bank of China (PBOC) let the yuan break the threshold of 7.0 per dollar for the first time in 11 years, signalling that it was opening the door to letting its currency weaken as it prepares for higher US tariffs and greater trade friction.

A new round of US tariffs on some Chinese goods was expected to take effect on Sunday, threatening to escalate an already bitter trade war. The additional US tariffs of 15 per cent on US$300bn of Chinese goods, along with the US labelling China as a currency manipulator, suggested that a near-term resolution of the trade war was unlikely.

Becky Liu, head of China macro strategy at Standard Chartered Bank, said US tariff increases have had a material impact on China’s exports, which grew only 0.6 per cent during the first seven months this year, down from 9.9 per cent in calendar 2018.

China’s exports have been losing global market share since 2016. The relatively modest depreciation and still-declining market share suggest more depreciation in the currency is needed to retain current market share, she said.

“We see further room for yuan depreciation, as China seeks to compensate for higher tariffs and its declining export market shares.

“The authorities are likely to allow the [yuan] to depreciate further to compensate for higher tariffs and expected weaker economic performance.”

So far, China has been able to offset some of the loss from diminished exports to the US by exporting more to other markets, such as the euro area, the 10 Asean nations in Southeast Asia, and Africa.

Offshore yuan slides towards record low after Trump tariff threat

“China’s export growth could possibly decline into negative territory in the fourth quarter and/or in the first half of next year due to the much faster imposition of additional tariffs since May 2019,” said Liu.

There are signs that the US and China will resume trade talks next month as increased tariffs loom.

President Donald Trump said some discussions were taking place on Thursday, with more talks scheduled. China’s commerce ministry also said a September round of meetings was being discussed by the sides, but said it was important that Washington cancel tariff increases.

Despite rapid yuan depreciation in recent weeks, the Chinese government remains fully in control of the exchange rate, analysts said.

The PBOC will prevent any disorderly depreciation by stepping up its offshore yuan liquidity management, such as issuing central bank bills in Hong Kong. It also uses its daily reference rate that forms the central point for the yuan’s allowable trading range to anchor the currency’s performance on foreign exchanges.


Category: China

Print This Post