Online Reporter
China is letting the yuan weaken against almost all major currencies to support its teetering economy as a trade war with the US deepens.
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 cut 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.
Yuan’s weakness against a basket of currencies makes Chinese products cheaper relative to other countries’ exports, which raises their attractiveness. That can help offset some of the impacts of Trump’s 125% tariffs, which threatens to decimate trade between the world’s largest two economies.
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.”
The latest installment of the trade crisis has Trump isolating China as the primary target of his trade offensive with a tariff pause on dozens of other countries. That’s after Beijing imposed 84% levies on all US imports and vowed to “fight till the end” against US levies.
The trade standoff raises the risk that Beijing may use measures other than tariffs to retaliate, which may keep up the depreciation pressure on the yuan.
“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. “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 agonise the US.
Trump has already accused China of manipulating its currency to offset tariffs, while US Treasury Secretary Scott Bessent called China the worst offender in the international trading system and that Beijing should not devalue its currency amid the levies.
“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. “China could see a need to maintain goodwill with trading partners, amid an increasingly fragmented global trading system.”– Bloomberg
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