Yuan’s Slide May Have More to Do With Economics Than Donald Trump
China’s currency is being hit by worrying asset bubbles and a continued reliance on stimulus
By Lingling Wei
BEIJING—China’s currency dropped to the lowest level in eight years Wednesday, extending a rapid decline over the course of a few days and demonstrating what officials and analysts say is the government’s increasing tolerance of a cheaper yuan as it combats a lagging economy and growing asset bubbles.
U.S. President-elect Donald Trump has been vocal throughout his election campaign in claiming China manipulates its currency to gain an advantage in trade by making its products relatively cheaper. But the fast depreciation lately underscores bigger concerns among Chinese policy makers and economists about the country’s economic situation.
Regardless of who is in the White House, officials and analysts say a weaker yuan would be the price of using easy money to prop up growth and to prevent a precipitous drop in housing prices. The result could be a yuan feedback loop driven primarily by internal forces, the people said. The rapid run-up in property prices in many cities, for instance, is sending more Chinese looking to foreign markets to park their money, potentially exacerbating capital outflows that would further drive down the yuan.
“For the foreseeable future, asset bubbles and uncertainty over China’s growth likely will be the main factor playing into renminbi’s depreciation expectations,” said an economic adviser to the Chinese leadership, using another name for the yuan.
On Wednesday, after the dollar strengthened overnight, China’s central bank, which controls the yuan’s trading in the mainland market, set the currency’s official rate, or “fix,” at 6.8592 per dollar—its weakest level in more than eight years. That brought the yuan’s loss against the dollar to nearly 1.4% in the week since Mr. Trump won the White House. Before mainland trading started Thursday, the PBOC again guided the fix lower, to 6.8692.
For now, investors have largely taken the yuan’s slump in stride, as it is in keeping with the dollar-driven exchange-rate mechanism that the central bank put in place early this year. Investors also are aware that Beijing has the tools to prevent a free fall in the yuan.
But some Chinese officials and investors are questioning whether the central bank is prepared for a sustained dollar rally under the Trump administration.
Skeptics compare the yuan’s most recent tumble to its drop following the U.K.’s unexpected vote to leave the European Union five months ago, which also threw currency markets into turmoil and sent the dollar soaring. Then, the People’s Bank of China quickly said it had put contingency plans in place and would keep the yuan stable. This time, the central bank hasn’t made any public statements.
In recent days, the PBOC hasn’t conducted any large-scale intervention intended to support the yuan, according to currency traders. The relatively hands-off approach, China experts say, underscores Chinese officials’ overall wait-and-see attitude toward Mr. Trump and which campaign pledges he will take action on.
The PBOC declined to comment on the yuan’s recent moves. Representatives for Mr. Trump couldn’t immediately be reached for comment.
In anticipation of higher interest rates in the U.S. and a continued dollar rally, some investment banks including UBS Group AG, HSBC Holdings PLC and Standard Chartered PLC in recent days have lowered their year-end projections for the yuan to around 6.90 per dollar.
“While China’s highly controlled exchange-rate regime may have saved the yuan from a dive like the Mexican peso, we believe the pressure will still manifest itself” through the potential for growing trade tensions between Washington and Beijing, said Harrison Hu, chief China economist at Royal Bank of Scotland Group in Singapore.
Some officials close to the country’s economic mandarins are hoping that Mr. Trump will be pragmatic in his dealings with Beijing as both countries stand to lose from trade or currency conflicts. Meanwhile, executives at some big Chinese companies that sell to the U.S. markets are trying to put together a plan B in the event of a much tougher U.S. stance on trade under Mr. Trump.
Chinese outflows continue: Foreign-exchange reserves plunged $45.7 billion in October from the previous month to $3.12 trillion. China’s stockpile of foreign currencies was eroded by more than half a trillion dollars last year.
Beijing in recent months has sought to limit bubbles in China’s bond and property markets. The central bank has refrained from aggressive monetary-easing measures while trying to ensure liquidity in the financial system.
But the government also is treading carefully so as not to cause a sharp drop in home prices because home sales have supported a slowing economy as other growth engines such as manufacturing and business investment remain lackluster. Authorities may need to keep interest rates low for a while to support housing prices and China’s overall growth, said Zhu Chaoping, China economist at UOB Kay Hian Holdings Ltd., a Singapore-based investment bank. That would translate into more room for the yuan to depreciate, he said. Lower interest rates tend to put downward pressure on a country’s currency.
The central bank has previously dismissed suggestions that it is sacrificing the yuan’s exchange rate to support the property market. It said in its third-quarter monetary-policy report released last week that would be “too big of a price” to pay, resulting in “structural distortions” and “accumulation of debt.” It said China will maintain a “prudent and neutral” monetary stance.
Still, if authorities keep printing money aimed at bolstering growth, economists warn, that ultimately would lead to a sharply weaker yuan.
“If money supply can’t be effectively controlled, then the path of depreciation would be a long one,” said Li Xunlei, chief economist at Haitong Securities, a large firm in China.