Authorities controlling the People’s bank of China (PBOC) seem to have enjoyed the devaluation of the yuan (RMB) over the past month. Unlike the devaluing of yuan in 2015 that brought global backlash upon itself, the recent weakening of yuan seem to have gone largely unnoticed until President Trump addressed it.
After the yuan’s 6-week-long fall against the dollar, reaching its lowest level in over a year, Trump charged Chinese authorities for manipulating yuan which has been “dropping like a rock”.
In Trump’s tweet and an interview with CNBC, he said that the Chinese Communist Party (CCP)’s significant devaluation of the Chinese yuan has put US at a great disadvantage. Similarly, Trump warned of currency and interest rate adjustments from the EU and other countries which removes the “competitive edge” of the growing U.S. dollar.
China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the dollars gets stronger and stronger with each passing day – taking away our big competitive edge. As usual, not a level playing field…
— Donald J. Trump (@realDonaldTrump) July 20, 2018
Trump’s remarks on the CCP’s currency manipulation and vicious competition have added to the scrutiny on the CCP’s management of yuan. As Bloomberg reported, the Obama administration has made similar complaints about China’s currency manipulation in the past.
According to Bloomberg, the yuan has dropped by nearly 5% since mid-June. The question now for CCP officials is whether to ease their control over the central bank of China to support growth in infrastructure as an alternative to boosting exports and to maintaining its position in the trade war. Economic analysts have warned of a replay of 2015 when the shockwaves of the CCP’s currency manipulation had severely affected the stock market as well as global trade.
Economists have also noted that the yuan’s depreciation also points to China’s decline in economic growth and the rising incidence of corporate misconducts.
Frederic Neumann, co-head of Asian economics research at HSBC Holdings Plc in Hong Kong told Bloomberg, “You have the Fed hiking and PBOC easing, so at some point it will be reflected in the FX market.”
Bloomberg economists estimated that the yuan is overvalued by 6.6% currently, according to economic fundamentals. Fielding Chen and Tom Orlik pointed out in an analysis that the decline in the yuan is in line with Beijing’s wishes.
However, China has reasons to avoid the continued decline in yuan. A few years ago, the Central bank of China had burned through $1 trillion of reserves in the face of capital outflow caused by the decline of the yuan. Morgan Stanley estimated $10.7 billion of capital outflow from China this June.