China’s currency just hit its weakest value in almost a year
PBOC faces pressure to revive the kind of interventions undertaken in the past
The yuan’s rapid slide is posing a new test for Beijing as it grapples with a looming trade war, putting the central bank under pressure to revive the kind of interventions undertaken in the past to defend the currency’s value.
In an effort to calm jittery investors, China’s central-bank chief Yi Gang on Tuesday pledged to keep the yuan’s exchange rate “basically stable at a reasonable and balanced level,” according to an article posted on the website of the People’s Bank of China. The currency, which had fallen as much as 1.1% in early trading in mainland China — hitting its lowest intraday level since Aug. 7 — recovered to close down 0.3%, with one dollar worth 6.6672 yuan.
If the yuan continues to weaken in the next few trading days, government advisers and analysts say, the PBOC likely would reach into its tool kit to control the pace of decline, including tweaking the way it sets the yuan’s official rate.
After outperforming most emerging-market currencies for much of the year, the yuan has quickly turned into one of the worst-performing currencies in Asia over the past month. It has lost nearly 4% versus the dollar since June 1 and given up much of its year-to-date gain against a basket of its trading partners’ currencies including the euro and Japanese yen. Less than two months ago, the yuan was up 3.2% for the year on a trade-weighted basis: now it is up just 0.9%.
The drop does reflect broader global trends. While China’s growth is showing signs of slowing, the U.S. economy has been performing robustly, encouraging the Federal Reserve to press ahead with interest-rate increases that have strengthened the dollar against a broad range of global currencies.
Adding to the yuan’s pain is the heightened threat of an allout trade war with the U.S. Both countries are set to impose tariffs on goods from each other from Friday.
But even if the yuan’s slide is logically sound — and may even suit the needs of the country’s exporters by making their goods cheaper in foreign markets — Beijing will want to ensure it doesn’t turn into a rout, government advisers say. Chinese officials have said Beijing won’t use yuan devaluation as a way to hit back at the U.S. on trade. But the central bank’s recent monetary easing measures, which increased the supply of yuan funds in the financial system, have added pressure weakening the currency.
The central bank “should be on alert for an overshooting,” said Sheng Songcheng, a senior adviser at the PBOC.
To date, the Chinese central bank has largely stayed its hand, partly because it has been trying to resume giving market forces greater sway over the yuan’s value, an effort that had stalled following the yuan’s slump in late 2015 and 2016.
For sure, the central bank has been letting the yuan weaken against a rising dollar. The PBOC determines a daily “fix” for the dollar against the yuan, and allows the currency pair to trade within a range above and below that level.
Market participants say the central bank hasn’t been letting the yuan fall as much as they expected when it sets the fix in recent weeks. And at least one state-owned bank sold a large amount of dollars at one stage last week, traders say — normally a sign that the central bank is trying to support the yuan’s value.
But traders say the decline in the fix has been less than expected in recent weeks. And they add that at least one stateowned bank sold a large amount of dollars at one stage last week — normally a sign the central bank is trying to support the yuan.
The question now for the central bank, as before, is whether the one-way movement of the currency could cause speculative capital flows that could disrupt the domestic economy. Too much money leaving China could create a shortage of liquidity for a financial system already battling rising defaults.
So far, it appears officials haven’t detected signs of a major exodus of cash.
“Recent depreciation hasn’t caused capital outflows,” said Xiao Lisheng, a senior economist at the Chinese Academy of Social Sciences, a government think tank. But a further10 or15 trading days of depreciation would likely drive the central bank to intervene, Mr. Xiao said.
One available tool in the PBOC’s arsenal is a “countercyclical” factor to use in setting the fix. During the latter half of 2017, it applied the factor in a way that helped curb depreciation expectations for the yuan. But in January, as the yuan started to rise in value, the PBOC suspended its use, signalling it didn’t want the currency to strengthen too much and was aiming to restart the process of giving the market more sway.
Now, analysts say, the central bank could resume applying the factor. But that would represent a step back from its previous pledges to speed up its liberalization effort.