China’s yuan con­tin­ues its de­scent amid fears of harm­ful U.S. trade war

The Standard (St. Catharines) - - Business - JOE MC­DON­ALD

BEI­JING — China al­lowed its cur­rency to fall fur­ther Tues­day and ac­cused Wash­ing­ton of de­stroy­ing the global eco­nomic or­der, fuelling fears about in­creas­ing dam­age from their trade war.

The yuan de­clined to 7.0562 to the U.S. dol­lar be­fore strength­en­ing to 7.0297 in the af­ter­noon. That came a day af­ter Bei­jing sent fi­nan­cial mar­kets tum­bling by al­low­ing the cur­rency to fall to an 11-year low, break­ing through the po­lit­i­cally sen­si­tive level of seven to the dol­lar.

The Trump ad­min­is­tra­tion re­sponded Mon­day by declar­ing that China im­prop­erly ma­nip­u­lates the yuan’s value. That opens the way to pos­si­ble new U.S. penal­ties on top of tar­iff hikes al­ready im­posed in a fight over Bei­jing’s trade sur­plus and tech­nol­ogy poli­cies.

The rul­ing Com­mu­nist Party’s main news­pa­per ac­cused Wash­ing­ton of “de­lib­er­ately de­stroy­ing the rules-based in­ter­na­tional or­der” and jeop­ar­diz­ing eco­nomic co-op­er­a­tion. It didn’t men­tion Mon­day’s cur­rency de­ci­sion but ac­cused the Trump ad­min­is­tra­tion of us­ing Amer­i­can fam­i­lies as hostages in trade talks.

“One can­not un­der­stand how such a big, in­ter­na­tion­ally in­flu­en­tial coun­try could be so ir­re­spon­si­ble,” the Peo­ple’s Daily said.

The Chi­nese cen­tral bank de­nied im­prop­erly ma­nip­u­lat­ing the ex­change rate, say­ing the yuan’s de­cline was driven by mar­ket forces. On its web­site, the Peo­ple’s Bank of China called the U.S. de­ci­sion “pro­tec­tion­ist be­hav­iour” that will have “a ma­jor im­pact on global fi­nance.”

U.S. Pres­i­dent Don­ald Trump rat­tled in­vestors with last week’s sur­prise an­nounce­ment of puni­tive tar­iffs on an ad­di­tional $300 bil­lion of Chi­nese im­ports, ef­fec­tive Sept. 1. That came af­ter a round of talks on re­solv­ing their tar­iff war ended in Shang­hai with no in­di­ca­tion of a deal.

“The lat­est U.S. move will likely harden China’s po­si­tion in trade ne­go­ti­a­tions,” Tao Wang of UBS said in a re­port.

U.S. of­fi­cials com­plain that a weak yuan — also known as the ren­minbi, or “peo­ple’s money” — makes China’s ex­port prices un­fairly low, hurt­ing for­eign competitor­s and swelling Bei­jing’s trade sur­plus.

Wash­ing­ton’s lat­est moves may be “ev­i­dence that the U.S. ad­min­is­tra­tion may not re­ally want to reach a trade deal soon,” Wang said. “We be­lieve there is an in­creas­ing risk to a de­lay or can­cel­la­tion of the planned trade talks.”

Asian stock mar­kets fell for a sec­ond day. China’s main in­dex lost 1.6 per cent and Aus­tralia’s was down 2.4 per cent. Mar­kets in Tokyo, Hong Kong and Seoul also re­treated.

“Equities are slumping. They will slump more,” Rabobank’s Michael Every said in a re­port. “Worry about global trade flows, as a stronger USD rum­bles through the real econ­omy and U.S.-China divorce smashes sup­ply chains.”

The Chi­nese cen­tral bank gover­nor, Yi Gang, tried to re­as­sure in­vestors, promis­ing in a state­ment late Mon­day to stick to com­mit­ments “not to use ex­change rates for com­pet­i­tive pur­poses.”

The cen­tral bank is “com­mit­ted to main­tain­ing the ba­sic sta­bil­ity” of the yuan “at a rea­son­able and bal­anced level,” Yi said.

The Peo­ple’s Bank of China sets the ex­change rate each morn­ing and al­lows the yuan to fluc­tu­ate by two per cent against the dol­lar dur­ing the day. The cen­tral bank can buy or sell cur­rency — or or­der com­mer­cial banks to do so — to dam­pen price move­ments.

On Tues­day, the yuan’s start­ing ex­change rate was set at 6.9683. That would al­low the cur­rency to weaken to as much as 7.100 while stay­ing within the two per cent trad­ing band.

The dol­lar’s un­ex­pected strength against the yuan could have global reper­cus­sions, ac­cord­ing to Nick Wall of Me­rian Global In­vestors. He said many for­eign bor­row­ers need to re­pay debts in dol­lars that might be­come harder to ob­tain.

“The risks of a fur­ther dol­lar squeeze and more for­eign ex­change volatil­ity are now quite high,” Wall said in a re­port.

China has vowed to avoid “com­pet­i­tive de­val­u­a­tion” to boost ex­ports by mak­ing them less ex­pen­sive abroad. But reg­u­la­tors are try­ing to make the state-con­trolled ex­change rate more re­spon­sive to mar­ket forces, which are push­ing the yuan down.

Trump’s tar­iff hikes have put down­ward pres­sure on the yuan by fuelling fears that eco­nomic growth might weaken. A lower yuan helps ex­porters cope with tar­iffs of up to 25 per cent im­posed by Trump on bil­lions of dol­lars of Chi­nese goods.

THE AS­SO­CI­ATED PRESS

China’s yuan de­clined to 7.0562 to the U.S. dol­lar on Tues­day be­fore strength­en­ing to 7.0297 in the af­ter­noon. That came a day af­ter Bei­jing sent fi­nan­cial mar­kets tum­bling by al­low­ing the cur­rency to fall to an 11-year low, break­ing through the po­lit­i­cally sen­si­tive level of seven to the dol­lar.

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