Why Weaker Yuan Risks Making Trade War a Currency War

China’s management of its currency, the yuan, is under fresh scrutiny after a record eight-week drop in the exchange rate made it a focus in the U.S.-China trade war. The yuan has tumbled more than 6 percent against the U.S. dollar since mid-June, just as the two sides ratcheted up tariffs and threats of more to come. That’s the most significant slide since 2015, when a surprise devaluation roiled markets. Chinese officials say they favor a stable currency, and economists say some weakness in the currency is justified. But since a weaker exchange rate makes Chinese goods cheaper, there’s at least some risk the trade war will spiral into a currency war.

At the least, it’s been letting the yuan slide. The currency doesn’t float freely but is instead managed using a fairly opaque system in which the central bank fixes daily reference rates. Starting in mid-June, the yuan went on a record slide that took it to its lowest level in more than a year against the dollar. Though Chinese leaders have long said they want a more flexible exchange rate, the timing of the yuan’s decline has some wondering if the trade war is becoming a currency war. On July 19, U.S. President Donald Trump said that China’s currency “is dropping like a rock,” putting the U.S. “at a disadvantage.” The People’s Bank of China on Aug. 3 made it more expensive for local traders to bet against the yuan, a surprise move that analysts said demonstrated the depreciation had gone far enough for the central bank. Even so, the yuan weakened after an early rally during the next trading day.