PBOC Finds Friend in Trump as Yuan Seen Falling Versus Peers

  • Currency will drop to record low versus peers this year: BBVA
  • PBOC followed strategy of trade-weighted drop for much of 2016

U.S. Stops Short of Calling China a Currency Manipulator

Donald Trump is turning into a surprising ally for Chinese currency officials.

The U.S. president’s view that the dollar is too strong and his decision to back away from labeling China a foreign-exchange manipulator both support the Asian nation’s tried-and-tested strategy: stability versus the greenback and declines against pretty much everything else. After the Chinese currency’s gain in the wake of Trump’s jawboning this week was smaller than most other Asian trading partners, the yuan’s top forecaster says it will drop to a record low against a basket of peers this year.

“Trump’s comments give China a good opportunity to push the yuan weaker against peers, and the decline will probably accelerate if the dollar keeps dropping," said Xia Le, a Hong Kong-based economist at Banco Bilbao Vizcaya Argentaria SA, the yuan’s most-accurate forecaster as ranked by Bloomberg. "This will benefit Chinese exporters, as long as policy makers keep the depreciation under control and avoid disrupting financial stability."

Life gets easier for China’s monetary authority when the dollar weakens: it takes the heat out of concern about devaluations and capital outflows, and provides wriggle room to depreciate the yuan against other exchange rates. The blueprint is working well this year: the Chinese currency has climbed 0.9 percent against the dollar, while weakening against every other major currency.

The disparity accelerated on Thursday after Trump said he won’t brand China a currency manipulator, backing off from a core campaign promise. He said also that the dollar’s strength is “hurting us.” The yuan rose 0.08 percent against the greenback on Thursday, lagging gains of 1 percent for South Korea’s won and 0.7 percent for Taiwan’s dollar.

The Chinese currency was little changed at 6.8876 per dollar as of 5:07 p.m. on Friday in Shanghai.

A Bloomberg replica of the CFETS RMB Index -- which measures the yuan against the exchange rates of 24 trading partners -- fell 0.08 percent on Friday, and will drop another 3.4 percent by year-end, said BBVA’s Xia. While China says the yuan’s rate is market-determined, it restricts daily moves to 2 percent on either side of a daily reference rate. The Department of the Treasury is set to release a biannual review of the currency practices of the U.S.’s trading partners.

The strategy of yuan weakness against trading partners appears to be paying off. China’s exports last month jumped the most in two years as global demand held up. Imports moderated after a holiday-season surge in February and the trade balance rose.

“It’s going to be very easy for the yuan index to break the previous record low,” said Tommy Ong, managing director for treasury and markets at DBS Hong Kong Ltd. “The yuan’s correction on the trade-weighted side is far from done, considering how much the currency has appreciated in the past few years.”

— With assistance by Tian Chen, and Helen Sun

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