China yesterday allowed its yuan to fall below the politically sensitive level of seven to the US dollar for the first time in 11 years, raising the possibility Beijing might use devaluation as a weapon in a tariff war with Washington.
The central bank blamed the exchange rate’s decline on “trade protectionism.”
That followed US President Donald Trump’s threat last week of more tariff hikes on Chinese goods in a bruising fight over Beijing’s trade surplus and technology policies.
The currency weakened to 7.0267 to the US dollar by midday, making one yuan worth US$.0142, its lowest level since February 2008.
“The thought of a currency war is crossing more than a few traders’ minds,” VM Markets Pte Ltd managing partner Stephen Innes said in a report.
The weakness of the yuan is among US grievances against Beijing. US officials complain a weak currency makes Chinese export prices unfairly low, hurting foreign competitors and swelling Beijing’s trade surplus.
The People’s Bank of China (PBOC) sets the exchange rate each morning and allows the yuan to fluctuate by 2 percent against the US dollar during the day.
The central bank can buy or sell currency — or order commercial banks to do so — to dampen price movements.
The bank “likely sees no urgent need” to keep the yuan stable “and 7 is no longer a line of defense,” Innes said.
The level of seven yuan to the US dollar has no economic significance, but could revive US attention to the exchange rate.
A PBOC statement yesterday blamed “unilateralism and trade protectionism measures,” a reference to Trump’s tariff hikes. but it tried to play down the significance of “breaking seven.”
“It is normal to rise and fall,” the bank said, adding that it would “maintain stable operation of the foreign exchange market.”
The yuan has lost 5 percent since hitting a high in February of 6.6862 to the US dollar. That helps exporters cope with tariffs of up to 25 percent imposed by Trump on billions of dollars of Chinese goods, but it raises the risk of inflaming US complaints.
Chinese leaders have promised to avoid “competitive devaluation” to boost exports by making them less expensive abroad — a pledge PBOC Governor Yi Gang (易綱) affirmed in March.
However, regulators are trying to make the state-controlled exchange rate more responsive to market forces, which are pushing the yuan lower.
Trump rattled financial markets on Thursday by announcing plans for 10 percent tariffs on an additional US$300 billion of Chinese goods, effective Sept. 1. That would extend penalty duties to almost all US imports from China.
The US Department of the Treasury declined in May to label China a currency manipulator, but urged Beijing to take steps “to avoid a persistently weak currency.”
A weaker yuan also might disrupt Chinese efforts to shore up cooling economic growth. It would raise borrowing costs by encouraging an outflow of capital from the world’s second-largest economy.
The PBOC tried to discourage speculation in August last year by imposing a requirement that traders post deposits for contracts to buy or sell yuan. That allows trading to continue but raises the cost.
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