Some members of Congress have backed legislation to impose retaliatory tariffs.
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“This gradual approach has served China well and other countries would do well to take note the speed and order in which China has liberalized its currency“.
Between Tuesday and Thursday of last week, China’s central bank – the People’s Bank of China – allowed the yuan to fall to its lowest level against the dollar in four years. It also was welcomed by the worldwide Monetary Fund and cautiously by the U.S. Treasury, but criticized by some U.S. politicians, prompting talk of a “currency war”. It reached a two-week high of $1.5690 overnight after comments from Bank of England policymaker Kristin Forbes reinforced expectations of an impending rate hike, but has pulled back on caution ahead of inflation data due later in the session.
The rising dollar has hurt U.S. exporters by making their goods more expensive overseas.
“The combined drop is the biggest since China set up its modern foreign exchange system in 1994”, when it devalued the yuan by 33% at a stroke.
Mr Lo argued that Beijing will resist further devaluation because it would not significantly help the country’s export sector. On Wednesday, for instance, China reported that auto sales sank 6.6 percent in July.
US crude futures fell 0.8 percent to $41.49, within 15 cents of making a new six and a half year low.
Tuesday’s move “signals a new government willingness” to let the currency decline, said USB economist Tao Wang in a report.
“We are seeing a much calmer market today… now it’s understood that it’s actually not an intentional steering of the yuan exchange rate, but rather… a more market-driven move”, said Commerzbank currency strategist Esther Reichelt in Frankfurt. The CNY and CNH trade at different exchange rates.
A weaker yuan might prompt complaints by foreign manufacturers. “The resultant increase in FX volatility will raise the cost of worldwide trade and investment, leading to contraction in capital flows and global growth, and thus, a lose-lose outcome”, he said.
The centre of Tuesday’s trading band was set 1.9 per cent below Monday’s level.
The yield on the benchmark one-year government bond is now at 2.30%, up from 2.19% before Beijing devalued the yuan. The trade remains in surplus but the reserves have fallen over the last two quarters thanks to capital fight by portfolio investors after the sharp fall in equity prices in June/July: this perhaps is the reason why the yuan fell in the market, followed by a corresponding change in the official rate on three successive days last week.
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The situation is probably manageable under our base-case scenario, which is that the yuan gradually weakens further to 6.60 to the U.S. dollar in 12 months’ time.
