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Why Yuan at 7/dollar risks inflaming trade war


Date: 21-05-2019
Subject: Why Yuan at 7/dollar risks inflaming trade war
The yuan’s recent slide risks re-igniting one of US President Donald Trump’s favorite criticisms of China: that Beijing weakens its currency to aid exporters. 

While analysts say the exchange rate is being driven by souring market sentiment as China’s economy slows and the US ramps up tariffs, the slide towards 7 against the dollarNSE -0.31 % comes during crunch trade negotiations. 

The offshore yuan has fallen almost 3 per cent this month, making it the worst performing currency in Asia, and the onshore yuan broke the 6.9 level on Friday for the first time this year. 

"This will give ammunition to hawks in Washington," said Hui Feng, a senior research fellow at the Griffith Asia Institute and co-author of “The Rise of the People’s Bank of China.” 

That’s probably one of the reasons why China is now pushing back. The nation has ample policy tools to cope with fluctuations in the currency market, State Administration of Foreign Exchange head Pan Gongsheng said in an interview with Financial News published on the central bank’s website Sunday. There is more harm than good if the yuan weakens past 7, as a breach of the level may hurt confidence and increase outflows pressures, according to a China Business News article co-authored by former central bank official Sheng Songcheng. 

On Monday, the People’s Bank of China set the daily reference rate at a level stronger than analysts and traders projected, a sign that Beijing is seeking to slow depreciation. The onshore yuan advanced for the first time in four sessions, rising 0.08 per cent to 6.9135 as of 4:39 p.m. in Shanghai. The fixing restricts the onshore yuan’s moves by 2 per cent on either side 

While tight capital controls and the world’s biggest holding of foreign exchange reserves offer a crucial buffer, the yuan’s weakness will also be a test for President Xi Jinping, who as recently as last month pledged against currency depreciation that harms other nations. 

A weaker currency risks pressuring households and companies to get money out of the country and would force the government to draw on its more than $3 trillion reserves to defend it. 

A yuan sell-off would also rattle investors, as seen in the aftermath of a shock devaluation in 2015. That year, the slide in the currency triggered panic in the stock market and stoked concerns of a hard landing. 

The worry is that a yuan slump could make consumers less willing to spend and corporates lose the motivation to make investments, according to Citigroup Inc. strategists Lu Sun and Gaurav Garg. 

It could also trigger trading partners to allow their currencies to weaken in response. 

The PBOC may control volatility in the yuan, with tools such as stronger fixings and cash drainage in Hong Kong, if trade tensions escalate, according to Chun Him Cheung, a strategist at Morgan Stanley. The currency will most likely remain stronger than 7 because China prefers a stable exchange rate, but it could weaken beyond that level if "hawkish rhetoric around trade flares up" in the coming weeks, he wrote in a note dated Monday. 

Source: economictimes.indiatimes.com