Caixin
Nov 11, 2016 07:33 PM
ECONOMY

Trump's Rhetoric, Strong Dollar Blamed as Yuan's Value Slides

China's yuan passed another milestone on the devaluation road Friday as the central bank, responding to a strengthening greenback, set the currency's daily fixing rate at more than 6.8 to the dollar.

The People's Bank of China set the central parity rate's midpoint at 6.8115 yuan per dollar — the Chinese currency's weakest point since September 2010.

Forex market analysts who've been watching the yuan's value decline over the past year blamed the latest weakening on delays for China's structural reform campaign and the specter of U.S. trade protectionism under U.S. President-elect Donald Trump.

Analysts expect the Chinese currency to continue to soften in coming months, particularly against the backdrop of a U.S. economic recovery and an anti-globalization movement that's cast a shadow over China's exports.

Wang Tao, UBS' chief China economist, expects the Chinese government to intensify its use of fiscal policies to offset any negative effect from the yuan-devaluation trend that began in August 2015. She said UBS analysts expect the yuan to trade at around 6.8 by the end of the year, and further weaken to 7.2 by the end of 2017.

Trump's election victory put even more depreciation pressure on the yuan, said Zhang Jun, chief economist at Morgan Stanley Huaxin Securities. If the president-elect's strategies for infrastructure spending and tax cuts signal a U.S. economic rebound, the U.S. Federal Reserve may be even more likely to increase interest rates in December, he said.

Indeed, the U.S. dollar index made a U-turn after Trump's victory, signaling further strengthening of the dollar against other currencies.

That development triggered the central bank action, which in turn pushed the Chinese onshore forex market to devalue the yuan by nearly 200 basis points to close at 6.8155 on Friday.

The dollar index is unlikely to change again significantly anytime soon, said Zhong Zhengsheng, director of macroeconomic analysis at CEBM, a subsidiary of Caixin Insight Group. Now, in the wake of the shock surrounding Trump's victory, Zhong thinks the central bank has an opportunity to advance currency reform and move toward a more market-oriented foreign-exchange-rate system.

Morgan Stanley Huaxin Securities' Zhang argued China hasn't gone far enough with structural reform, as its economy still heavily relies on the real estate market. Reform delays have put pressure on the yuan-dollar exchange rate, he said.

The Chinese economy also faces Trump-related risks. The president-elect has criticized China's trade policy, calling the nation a currency manipulator and threatening to impose a 45% tariff on Chinese imports.

"Trade protectionism and tariffs against China will hurt Chinese exports and put depreciation pressure on the currency," Wang said.

Market watchers have warned of negative repercussions if the yuan slides as low as 6.83 against the dollar. A finance department source at a major bank who asked not to be named said a further weakening below that level could be viewed as a crisis.

Nevertheless, Wang expects the yuan's downward journey to continue. The Chinese currency "may weaken beyond 7.2 if there are unilateral tariffs against China and a stronger U.S. dollar," she said.

Contact reporter Coco Feng (renkefeng@caixin.com); editor Eric Johnson (ericjohnson@caixin.com)

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