Yuan sinks as US report declines to label China a currency manipulator
China's politically-sensitive yuan sank to a 22-month low against the dollar on Thursday after the US Treasury declined to label Beijing a currency manipulator amid a mounting tariff battle.
The closely-watched yuan fell to 6.9411 per dollar at mid-morning, coming its closest to breaking the symbolically significant level of 7 to the greenback since December 2016. It recovered slightly in the afternoon.
The yuan, also known as the renminbi, or "people's money", has declined by almost 10 per cent against the dollar since April as China's economic growth cooled and US and Chinese interest rates went in opposite directions.
That helps Chinese exporters cope with tariffs of up to 25 per cent imposed by US President Donald Trump in a fight over Beijing's technology policy. But it raises the risk of inflaming American complaints about Beijing's trade tactics.
Chinese officials have promised to avoid "competitive devaluation" to boost exports. Central bank governor Yi Gang repeated that pledge last weekend at a finance conference in Indonesia. But they have not said how far the yuan might be allowed to fall in response to market forces. On Wednesday, the US Treasury's bi-annual report on currency policy said China failed to meet criteria to be labelled a currency manipulator, a status that can trigger sanctions.
But it said Beijing was, along with Japan and Germany, on a list of governments whose currency polices would be closely monitored. China's foreign ministry welcomed the report and said it reflected "common sense and the consensus of the international community".
"We hope the United States will respect the law of the market and basic facts and refrain from politicizing the currency issue," said a ministry spokesman, Lu Kang.
The yuan's depreciation is "reasonable and explainable," said Zuo Xiaolei, a former chief economist for Galaxy Securities in Beijing. Zuo noted some other developing country currencies have declined by 20 per cent or more in the same time. "If the renminbi had appreciated instead of depreciating this year, then China certainly would be a currency manipulator," Zuo said.
While it helps exporters, a weaker yuan also might encourage an outflow of capital from the world's second-largest economy. That would raise borrowing costs at a time when communist leaders are trying to shore up cooling growth. The central bank has been trying to make its exchange rate mechanism more efficient by increasing the role of market forces. The People's Bank of China sets the exchange rate each morning and allows it to fluctuate by 2 per cent against the dollar during the day in tightly-controlled trading.
The bank can intervene to buy or sell currency - or order Chinese banks to do so - to dampen price movements.
Most analysts expect the central bank to stop the yuan from crossing the politically sensitive line of seven to the dollar.
Allowing it to fall too far "would run the risk that Trump would brand China a currency manipulator," said Diana Choyleva of Enodo Economics in a report.
But some say the central bank, confident it can control any side effects, might allow the market to carry the yuan gradually lower.
Beijing's "calculation on exchange rate policy is likely to change" if Trump and his Chinese counterpart, Xi Jinping, make no progress at a possible meeting during a November gathering of the Group of 20 major economies, said Julian Evans-Pritchard and Mark Williams of Capital Economics in a report.
The central bank tried to discourage speculation by imposing a requirement in August for traders to post deposits for contracts to buy or sell yuan. That allows trading to continue but raises the cost.
Beijing imposed similar controls in October 2015 after a change in the exchange rate mechanism prompted markets to bet the yuan would fall. The currency temporarily steadied but fell the following year.
Beijing hits Washington over postal union pull-out
Meanwhile, China on Thursday criticised Washington's decision to leave the United Nations treaty that regulates international postage, amid a worsening trade dispute between the world's top two economies.
Foreign Ministry spokesman Lu Kang said the move should not be linked to China, despite arguments that the arrangement especially benefits Chinese manufacturers by making it cheaper to ship packages from Beijing to New York than from one side of the US to the other.
"We regret the US decision to withdraw from the Universal Postal Union," Lu told reporters at a daily Press briefing. "We will continue working with all sides to make our contributions to the development of global postal service."
President Donald Trump has said the 144-year-old UPU puts US businesses at a disadvantage and is used by shippers of the narcotic fentanyl to the US from China.
The move comes as the US has imposed tariffs on $250 billion in Chinese goods and Beijing has retaliated by targeting $110 billion in US products. The Trump administration says China's massive trade surplus with the US reflects unfair practices and that it is stealing intellectual property and forcing American and other foreign companies to hand over technology in exchange for access to the Chinese market.
US officials say they will be willing to renegotiate the postal treaty over the next year but will leave if no agreement can be reached.
Trump has made a point of cutting America's links with international agreements. His first week in office he pulled the United States out of a trade pact with 11 Pacific Rim countries. He also has left Unesco and the United Nations Human Rights Council and pulled the US out of the Paris climate accord.