China has quietly allowed its currency, the yuan, to slide to its weakest level against the U.S. dollar in over a decade as the Trump administration ratcheted up attacks on Beijing over its crackdown on Hong Kong and handling of the COVID-19 Outbreak.
The so-called renminbi, or RMB, which has slid 2.47 percent versus the U.S. dollar year-to-date, on Wednesday fell to less than 7.17 per dollar, its weakest since 2008. That pushed the currency below the levels that last summer caused the Trump administration to label Beijing a currency manipulator. The label was removed in January as the two sides ironed out an initial trade agreement.
“It’s almost like a game of bridge, where using non-verbal communication, the parties express their will,” Marc Chandler, chief market strategist at the capital markets trading firm Bannockburn Global Forex, said.
“It’s not so much the magnitude, but rather level, the RMB now at its weakest level in many months,” he added. “I think this is all related to the political pressure.”
Tensions between Washington and Beijing have escalated as the Trump administration has sought ways to punish China for its initial handling of the COVID-19 outbreak, which originated in its city of Wuhan.
The Virus has infected more than 5.99 million people worldwide and inflicted trillions of dollars of economic damage due to stay-at-home measures taken to slow its spread.
The strain from the pandemic has been heightened by friction between the world’s two largest economies on other matters. The U.S. has moved in recent weeks to sanction Chinese officials for mistreating Uighurs, a Muslim minority in Xinjiang, blocking pension funds from investing in companies in China and clamping down on rules for those firms listed on U.S. exchanges.
Beijing is simultaneously grappling with troop movements along its contested border with India, and on Thursday, China’s Congress passed a national security bill that bypassed Hong Kong’s legislature, effectively ending the “one country, two systems” governing principle that Beijing had guaranteed for the 50 years following Great Britain’s handover of the territory in 1997.
As a result, President Trump said Friday that he would direct his administration to “begin the process of eliminating policy exemptions that give Hong Kong different and special treatment” including agreements with Hong Kong on extradition, export controls on dual-use technologies and more.
Trump also instructed his presidential working group on financial markets to “study the differing practices of Chinese companies listed on the U.S. financial markets with the goal of protecting American investors.” Firms from China, and elsewhere, listed on U.S. exchanges do not have to abide by the same accounting standards as American companies.
The U.S. will, at least for now, remain in the trade agreement with Beijing, which calls for purchases of an additional $200 billion of American products over the next two years.
So far, the moves of China’s yuan against the dollar have been “orderly and controlled and within the realms of what we’ve seen in the past,” Alan Ruskin, global head of G10 currency strategy at Deutsche Bank, said.
He believes the current rate of exchange is “psychologically important” and a breakout to fresh decade-plus dollar highs would suggest Beijing is “tolerant of this new zone and tolerant of additional weakness” in its currency.
A weaker yuan is a double-edged sword as it would make China’s exports cheaper, but also make it more expensive to fulfil Beijing’s obligations under the trade deal, a signature accomplishment for Trump, who had imposed tariffs on hundreds of billions of dollars in Chinese goods to pressure Xi’s government into negotiating.
While there has been speculation that Trump may tear up the deal now, Ruskin says that’s “not in the U.S.’s interest” as the target levels for Chinese imports are “extremely high in the context of a weak global economy.”
Market risk points to the yuan weakening, but in a “very controlled fashion,” according to Ruskin. Really letting the currency go would be “disruptive” for Chinese markets and economic confidence, he said, adding that Beijing doesn’t “want to make this another source of tension.”
For good reason. Conventional wisdom is that China is “eating our lunch,” but the reality is China is “very weak,” Chandler said.
He pointed to President Xi Jinping’s signature Belt and Road Initiative and Made in China 2025 programs as being “in despair.”
The Belt and Road Initiative, which aimed to build a so-called New Silk Road connecting China to Europe, is becoming a debt albatross, leaving all the countries that borrowed money from Beijing looking to restructure their debt.
Additionally, Beijing has seen a likely peak in the internationalisation of China’s yuan, Chandler said, noting that “people aren’t really using it.”
That, coupled with the mishandling of Hong Kong which also alienates Taiwan, leaves China in a “weakened position” and its actions on the economic front “seem to be defensive rather than aggressive,” Chandler said. “China is under a lot of pressure.”