China’s currency, the yuan, is big news right now and, as far as President Donald Trump is concerned, it is bad news. He has accused the Beijing authorities of deliberately manipulating its value downwards in order to grab a bigger share of export markets.
Is Trump right?
It is certainly true that China’s currency is not left to float freely in the manner of sterling or the dollar. Instead, the authorities monitor its rate and, because it is not fully convertible with the outside world, they are able to influence the price.
Trade war move denied
This is known as a “managed float” or a “dirty float”. The country’s reserve institution, the People’s Bank of China, sets reference rates for the currency, which it then seeks to make stick in the market.
The United States has taken the view that any rate weaker than seven yuan to the dollar is an unacceptable devaluation of the yuan, also known as the renminbi, or “people’s money”.
One month ago, on July 12, the yuan was on the right side of that line, trading at 6.88 to the dollar. Today, it was on the other side, at 7.06 to the dollar.
A year ago, on August 12 , 2018, it was comfortably inside the seven-yuan limit, at 6.85. Its strongest point during the last 12 months came on 17 April, when it traded at 6.69.
It has been suggested that Beijing is staging a yuan devaluation to compensate for the loss of competitiveness caused by President Trump’s tariffs on Chinese imports, part of the ongoing U.S.-China trade war. However, China has denied this, and said the weaker exchange rate reflects the underlying position of its economy.
The Australian connection
Against the euro, the yuan is significantly weaker, trading at 7.9 to one. A month ago, on July 12, it was a little stronger, trading at 7.75. A year ago, on August 12, 2018, it changed hands at 7.8 to the euro.
Another important currency pair is with the Australian dollar, given China is an important market for Australia’s commodity exports. Currently, the rate is 1.65 to the Australian dollar, little changed from 1.61 a month ago on July 12, but noticeably weaker than the 1.56, at which it traded a year ago, on August 12, 2018.
In its most recent Article IV health check for the Chinese economy, published earlier this month, the International Monetary Fund (IMF) noted: “The Chinese economy is facing external headwinds and an uncertain environment. GDP [gross domestic product] growth slowed to 6.6% in 2018, driven by necessary financial regulatory reforms and softening external demand.”
“Growth is projected to moderate to 6.2% in 2019 as the planned policy stimulus partially offsets the negative impact from the US tariff hike on US$ 200 billion of Chinese exports.”
It added that headline inflation rose because of rising food prices and is expected to remain at about 2.5%, but said: “Reforms progressed in several key areas.”