China targets economy, not Trump, with weaker yuan


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  • Thursday, 26 Jul 2018

CHINA is letting the yuan slide primarily to combat a slackening economy, as the government rolls out more pro-growth measures amid an intensifying trade feud with the U.S.

At the same time, government advisers and economists say the nation’s leaders will refrain from actively devaluing the currency to hit back at the Trump administration. “China has no intention to turn the trade war into a currency war,” said an official involved in policy making.

At 6.7784 per dollar at the close of domestic trading on Wednesday, the yuan has lost 6.9% in three months, and isn’t far off one-year lows.

The slump in the yuan recently drew fresh ire from President Donald Trump, who in the past has accused China of manipulating its currency to gain a trading advantage by making its products cheaper. Last week Mr. Trump called out China and Europe for currency manipulation, and said the yuan was “dropping like a rock.”

But the fast depreciation reflects bigger economic concerns among Chinese policy makers. Fresh signs of a slowdown are emerging, from softening domestic consumption to rising corporate defaults and weakening investment in highways, factories and the like.

That, plus an expected decline in exports as a result of the trade battle, has led Beijing to shift its policy focus toward supporting growth from controlling debt. China’s central bank is pumping more funds into the financial system, enabling banks to make more loans. Local authorities are ramping up investments that had stalled due to Beijing’s tightfistedness.

A weaker yuan, the government advisers and economists say, is merely the price of this more accommodative policy. It also to a large extent reflects market moves, as the authorities set a trading band, known as the fix, every day based on currency moves in the previous day. The dollar, on the other hand, has risen this year as the U.S. Federal Reserve continues lifting benchmark interest rates.

“This round of depreciation is driven by economic fundamentals,” said Zhang Ming, a senior economist at the Chinese Academy of Social Sciences, a government think tank.

Many currency traders and analysts note China is also unwinding the yuan’s sharp gains earlier this year versus other major currencies in which it buys and sells goods. That would give Chinese exporters a leg up in global trade.

“China initially used the renminbi to play nice in the trade dispute,” said Robin Brooks, chief economist at the Institute of International Finance, using another name for the yuan. “That strategy is now over.”

To be sure, the shift looks dramatic. A surprise devaluation by the People’s Bank of China on Aug. 11, 2015 rattled global currency, stock and commodity markets, causing huge sums of money to flee China and exacerbating fears of a hard landing. But over the three months starting that day, the yuan only lost 2.5%.

This time, however, international investors have largely taken the slump in their stride. This is partly because China’s slowdown is less severe than three years ago, which reduces the impetus to take cash offshore, and partly because Beijing has tightened its grip on money flowing overseas. “China has become much better at clamping down on capital outflows,” said Joachim Fels, a global economic adviser at Pacific Investment Management Co.

Among other measures, China has restricted one of the biggest channels by curbing foreign direct investments, such as overseas takeovers. Chinese investment into the U.S. fell by roughly one-third in 2017. Authorities have also increased their scrutiny of unorthodox ways residents can move money abroad, such as buying foreign insurance policies.

That makes it less likely that Beijing’s actions could feed into a panic flight of capital, which would potentially destabilize the economy.

There are two more deterrents for skeptical investors. First, the government has made it less appealing to bet on further declines in the yuan, at times effectively shutting down offshore trading in Hong Kong. And it signaled its determination during the earlier crisis by burning through $1 trillion of foreign-exchange reserves to defend the yuan.

“We know that in case of China, [the currency is] completely in the hands of the policy makers,” said Wilfred Wee, a portfolio manager at Investec Asset Management in Singapore.

How much further the yuan depreciates could depend on future trade conflict. The White House has already levied tariffs on $34 billion of Chinese goods, and has a near-term plan targeting $200 billion more.

Olivier Blanchard, a senior fellow at the Peterson Institute for International Economics, reckons the currency has fallen enough to offset these charges, although he said his estimate ignores important nuances such as China’s use of imported components. However, the Trump administration recently threatened tariffs on almost all Chinese imports, which total more than $500 billion. – WSJ

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