As the US-China trade war heats up, the Chinese yuan (RMB) has re-emerged. On August 3rd 2018, the People’s Bank of China (China’s central bank) intervened, indicating that Beijing views the renminbi as depreciating too rapidly. However, according to market projections, the USD/CNY exchange rate is about to reach 7.0 from the current 6.85 it’s sitting on.
On the evening of August 3rd 2018, the People’s Bank of China (PBoC) announced that as of August 6th 2018 the foreign exchange risk reserve ratio of the forward sales business will be adjusted from 0% to 20% to prevent “macro financial risks”. The fix will increase the cost of companies that expect to continue to use the Chinese yuan in foreign exchange settlements and purchases, but it will help to prevent short-selling of the Chinese yuan. The PBoC announced the same measures during the renminbi resumption at the end of August 2015.
After the announcement, the offshore RMB exchange rate rebounded from RMB 6.9 to RMB 6.84 to one US dollar.
Before the intervention of the PBoC, the RMB had declined an approximate 7% in the last two months, pushing the USD/CNY exchange rate towards 7 which had been unprecedented since 2008. Even when China was subjected to mass capital outflow in the last 3 years, Chinese authorities had prevented the yuan from falling to such extent.
The Wall Street Journal reported that the depreciation of the RMB has made Chinese products cheaper to import, which serves to offset the impact of tariff increases in the United States. However it may also serve to instill fear in Chinese people and businesses, prompting them to hedge money overseas.
In the summer of 2015, China’s stock market suffered the most serious stock market crash in recent years, and the capital market was in chaos. On August 11 2015, the People’s Bank of China announced the adjustment of the RMB-USD exchange rate mechanism. The renminbi depreciated sharply over the next few days, setting off a depreciation cycle which had lasted for more than a year. During this period, China’s capital was seriously drained, forcing officials to instigate capital control and eventually stabilize the market. Under these conditions, the renminbi began to rebound in early 2017.
The US-China trade friction has intensified this year, with both parties continuously threatening the other side with tariffs. As a result, the RMB has been depreciating against the US dollar since mid-April, breaking the lowest record in the last 14 months.
President Trump’s administration announced on August 1 that it was considering raising the tariff rate from 10% to 25% on 200 billion U.S. dollars worth of Chinese goods. Beijing is not one to show weakness, and two days later the Chinese Ministry of Commerce announced that it will impose a tariff of 5% to 25% on 5,207 taxable goods, which translates into roughly US$60 billion of American goods.
Although China has repeatedly stressed that it does not want to enter a trade war with the United States, the US has paid attention to the recent heavyweight status of the renminbi. Chinese authorities are thus challenged with the balancing act of maintaining both its exports and its tariff on goods amidst the trade war.
On the other hand, the renminbi’s decline has been out of control, and market participants have doubts as to whether the renminbi can maintain the USD/CNY exchange rate below 7.0. Economists at Deutsche Bank predicted this week that the renminbi will be at 6.95 against the dollar this year.
The United States has gradually raised interest rates and recovered market funds. Meanwhile, China has committed to maintaining stable market liquidity. The difference in monetary policy between the two countries have also put pressure on the renminbi.
The report pointed out that China is the world’s second largest economy and a major player in global trade. The trend of the renminbi has a far-reaching impact on the world. When the PBoC had guided the devaluation of the renminbi three years ago, investors saw evidence of a slowdown in China’s economic growth, giving rise to global stock market volatility and a collapse in commodity prices as a result.
