Daily Management Review

Chinese authorities are afraid of yuan-dollar slump after Donald Trump's inauguration


11/21/2016


According to political consultants, China's leaders have remained unappalled even despite recent fall in the yuan. However, if the exchange rate overcomes psychological barrier of 7 yuan for dollar, it will lead to a rapid outflow of capital, of which the Chinese authorities are afraid.



Michael Vadon
Michael Vadon
On Friday, November 18, the RMB exchange rate has fallen to mark of 6.8796 for dollar. This eight-years record resulted from a sharp decline that occurred last week. The RMB exchange rate has fallen by 5.9% for the current year in total. If the decline continues, annual depreciation will be the most significant since devaluation of the Chinese currency in 2005.

China's party bosses believe that slump of the RMB exchange rate, observed in October, is a reflection of market trends, particularly, recent strengthening of the US dollar. However, it is hard enough to foreshow the yuan’s future after Donald Trump won the race, Reuters notes. During his election campaign, Trump promised to declare China a currency schemer, and introduce tariffs on imports of Chinese goods (though now his expressions have become more mild).

"The dollar is growing, and the central bank is following the current trend. There’s no need to resist market forces. A certain fall in the yuan exchange rate will stabilize market expectations and the economy, unless, of course, recession will not be sharp, "- said a political consultant, who asked to stay unnamed.

The People's Bank of China declined to comment on the situation.

The main concern in Beijing is that rapid depreciation of the yuan would lead to capital flight, similar to that which occurred after sudden devaluation in August. Many considered it a proof that state of the Chinese economy is not as good as the authorities are trying to show. By the end of January, China's foreign exchange reserves has fallen by $ 400 billion due to capital fleeing abroad. Since then, outflow from the $ 3 trillion-reserve has dried out a little, yet there’s still a concern that sunk renminbi may lash the outflow’s speed.

Traders say that on Thursday China's state-owned banks offered dollars for sale on domestic foreign exchange markets to slow decline of the yuan. According to them, it looked like the state was hitting the panic button.

This year, China's central bank ruled the yuan’s movement by tying it to the dollar. When the latter started to gain power, the government switched to the currency basket. Over the past few weeks, the yuan kept quite stable relative to the currency basket. The central bank is setting the national currency’s daily average value against the dollar basing on price at the close of trading the previous day, and taking into account changes in major currencies. 

In general, experts note that concern about "hard landing" of the Chinese economy is now being replaced by excitement of a trade war between Beijing and Washington, which could start if Trump still fulfill its election promises. Throughout the election campaign, Trump has repeatedly made Beijing a culprit of America’s troubles. Among other things, he promised to introduce a 45 percent duty on imported goods from China, and denounced the country calling it a "currency manipulator."

Chinese President Xi Jinping said that mutual cooperation is the only way for mutually advantageous cooperation between the world’s two largest economies. If Trump presidency keeps the interstate relations within the limits, then, according to some government economists, the exchange rate will fall to 7.2 yuan per dollar by the end of 2017. This would mean a reduction of 4.2% in the current level.

source: news.cn, reuters.com






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