The yuan weakened almost 1 per cent against the US dollar on Thursday to hit its lowest level in a year. It has now fallen by nearly 8 per cent over the past three months amid a global trade spat and concerns over an economic slowdown in China.
As per a report appearing in the CNN Money, analysts said the yuan plunged further after China’s central bank indicated that it was willing to accept a weaker currency.
The report further stated that a sliding currency means China’s huge export industry can cope with new US tariffs, as it makes Chinese products cheaper for buyers who pay in dollars. This could, in turn, give a shot in the arm to the economy which posted its slowest growth rate in nearly two years — 6.7 per cent — in the second quarter.
The yuan is different from the dollar or euro in the sense that it does not float freely against other currencies. Instead, China’s central bank helps guide the currency by setting a daily trading range. On Thursday, it surprised investors by guiding the yuan lower.
Experts say that the central bank would tolerate a weaker currency keeping the greater interests of the Chinese economy in mind. However, a weaker yuan has its flip side too – it risks increasing trade tensions with the Trump administration, which has repeatedly accused China of keeping its currency artificially low to support its huge export industry.
Analysts say it’s unlikely that China would use the weaker yuan as a weapon in the trade war. They point to the chaos caused in Chinese and global markets by sharp falls in the currency in 2015 and early 2016. However, trade tensions between US and China are at its peak with both the countries slapping billions of dollars of tariffs on each other’s goods and the US President, Donald Trump, threatening to strike again at even more Chinese exports.
The question is how much further the yuan may fall. If the yuan falls too quickly, it could prompt money to flood out of China as investors lose confidence and seek to exchange it for assets in dollars and other currencies.