Volatility in China's yuan due to escalating US trade friction - PBOC official

Monday, 12 Aug, 2019

To offset the negative impact caused by the Sino-US trade dispute, potential for trade cooperation between China and economies participating in the Belt and Road Initiative (BRI) such as Asean, Russia and Italy has been further unleashed this year, said China Machinery Industry Federation executive vice-president Chen Bin.

The central parity rate of the yuan weakened 43 basis points to 7.0039 against the USA dollar on Thursday, lower for a sixth consecutive day.

Stocks resumed their decline, capping a turbulent week dominated by concerns over an escalating trade war between the USA and China.

In theory, letting the currency fall without triggering panic allows the PBOC to ease policy as needed domestically.

In an annual review of China's economic policies, released on Friday, the International Monetary Fund (IMF) stood by its asessment that the value of the yuan was "broadly in line" with economic fundamentals, thus questioning the Trump administration's declaration that Beijing is manipulating its currency to gain "unfair competitive advantage in international trade".

"On the other hand, if this is the beginning of a new and risky phase of the trade war, then all bets are off, and the ensuing financial firestorm could push the U.S. and global economies into recession", Behravesh said.

Bulls say the dollar could profit from growing trade tensions. But China's currency "should remain flexible and market-determined", which would mean "less intervention".

The yuan has now weakened around 1.5% since U.S. President Donald Trump threatened last Thursday to impose more tariffs on Chinese goods from September 1, though there are signs China is trying to stem the declines.

The gloomy, and uncertain, outlook will make PBOC policy makers' decisions about how best to support the nation's slowing output with the exchange rate in mind more hard. It makes the central parity rate more consistent with the needs of market development. "The PBOC was caught in between", said Huang Yiping, a former adviser to the central bank.

The mechanism has been used to manage volatility since China removed the yuan's peg to the greenback in 2005.

The RMB exchange rate system is not flawless.

China's trade liberalisation efforts, such as the expansion of the China (Shanghai) Pilot Free Trade Zone and the hosting of the second China International Import Expo, scheduled for November, will also help the country to put its foreign trade on a firmer footing, said China Centre for International Economic Exchanges vice-president Wei Jianguo.

"The bilateral RMB/USD rate depreciated relatively rapidly from mid-June to early August 2018, when measures to counter depreciation pressure - the 20 percent reserve requirement for FX derivatives (a capital flow management measure (CFM)) and the countercyclical adjustment factor (CCAF) in the daily trading band's central parity formation - were reintroduced", the report said.

The yield gap between Chinese and US benchmark 10-year government bonds stood at 134 basis points on Friday afternoon, compared with a low of 28 basis points hit in November.