The Chinese Yuan treaded against the greenback at the weakest level since January amid the ongoing trade frictions with the United States (US) and expectations on a weaker economic outlook. The currency also showed further weakening after a report from the US treasury department avoided calling China a currency manipulator.
At around 2pm, Singapore time, the Chinese Yuan was at 6.94 against the US dollar, edging closer to the psychological barrier price of 7 per dollar.
The Yuan has tumbled by more than 9% against the dollar in the past 6 months, making it one of Asia’s worst performers for this year as the country is made to deal with internal issues of a slackened economic growth and rising debt levels, while fielding off trade war tariff attacks from the US.
On Wednesday, US Treasury Steven Mnuchin issued a report calling Beijing “not a currency manipulator,” but proceeded to raise concerns on China’s exchange rate practices and the Chinese Yuan’s recent fall.
In the report released to the US Congress, Mr Mnuchin flagged on China’s “lack of currency transparency” and the currency’s recent weakness, which poses major challenges to “achieving (a) fairer and more balanced trade”. Washington has long argued that China keeps its currency artificially low to make its exports competitive.
Following the US report’s comments, analysts are not expecting China to aggressively resist Yuan depreciation for fears of being called a currency manipulator. Prior to the report, some global banks such as JPMorgan Chase and Bank of America Merrill Lynch have already lowered their Yuan forecasts, predicting it to hit 7 against the greenback in six months.
China has certainly been seen defending its currency fall through the changes seen in their reserves and via its fixing trend, said IG market strategist Pan Jingyi. With a lack of a concrete improvement in US-China relations, it is likely that the Yuan will stay persistently weak, Ms Pan noted.
Ms Pan thinks the Chinese government is likely to plan on other fiscal and monetary policies should the 7 figure get challenged.
Stephen Innes, head of trading for Asia Pacific, Oanda Corp said the Yuan is likely to break 7 per dollar and China is unlikely to put up any defence, as the slowing economy does not support Yuan strength.
Yuan volatility “normal” says central bank
Earlier this month, China’s central bank had said it would cut the reserve requirement ratio, which would weaken the exchange rate. On October 15, the People’s Bank of China injected more liquidity to stimulate bank lending, making it the fourth time this year it made a cut on reserve requirements for lenders.
China’s central bank governor Yi Gang on Sunday called the Yuan volatility to be “normal” and the currency at a “reasonable and equilibrium level”.
The Yuan will stay in a reasonable range against the backdrop of an appreciating dollar for the full year, Mr Yi added.
Amid rising debt levels, China’s GDP for Q3 looks to be the weakest since 2009 post financial crisis
Concerns on China’s debt levels rise as the country faces a slower economic growth and trade tensions with the US.
Ratings agency S&P on Tuesday rang the alarm to China’s off-balance sheet borrowings, calling the amount “a debt iceberg with titanic credit risks”. S&P suggested that the amount could be as high as 40 trillion Yuan (S$7.95 trillion), and that the ratio of government debt to gross domestic product (GDP) could be 60% in 2017.
The debt levels puts a pressure on the Chinese economy as it faces off other problems. The world’s two largest economies have been slapping tariffs on each other, with the US imposing about US$250 billion of duties on Chinese goods and China retaliating with US$110 billion on US products.
A Reuters poll which interviewed 68 economists expects China’s economic growth for the third quarter of this year to slow down to its weakest pace since the global financial crisis as the ongoing trade tensions between China and US takes its toll. The experts forecast GDP to grow by 6.6% for July to September, slowing from the previous quarter’s 6.7% increase and making it the worst pace since first quarter of 2009.
It remains to be seen for the rest of the year, as the trade spat between the US and China has yet to see an end. For this year, China is expected to expand by 6.6%, and 6.3% in 2019.