China's central bank set the midpoint of the yuan's daily trading range above 7 to the American dollar for the first time in more than a decade. Photo / Getty Images
China's central bank set the midpoint of the yuan's daily trading range above 7 to the American dollar for the first time in more than a decade. Photo / Getty Images
China guided its currency past another key point widely watched by investors, signaling it may be willing to weaponise the yuan should President Donald Trump follow through on his threat to put more tariffs on Chinese goods.
China's central bank Thursday set the midpoint of the yuan's daily trading rangeabove 7 to the American dollar for the first time in more than a decade. The move in effect tells financial markets that Beijing expects the yuan to continue to weaken versus the dollar, perhaps well past the 7-to-the-dollar level.
That is likely to provoke more ire from the Trump administration. A weaker currency helps Chinese factories offset the higher costs of Trump's tariffs when selling their goods to the United States.
The move by the People's Bank of China in itself will not change the economics of the Chinese-American trade relationship. China on Thursday set the currency's midpoint at 7.0039 to the dollar, compared with the 6.9996 point it set Wednesday. China tightly controls trading of its currency, with that midpoint determining the center of a narrow range in which the yuan can strengthen or weaken during the day.
Such a hair's breadth move occurs every day in global currency markets. The yuan is already trading just above 7 to the dollar, a psychologically important level it breached Monday in China.
The move by China's central bank will likely provoke more ire from the Trump administration. Photo / AP
But China's action suggesting that it expects the currency to weaken further will put more focus on the central bank's daily midpoint in the coming weeks to see whether China will weaken the currency — perhaps to 7.5 or 8 yuan to the dollar — to the point at which it would significantly begin to weaken the impact of US tariffs. A higher number versus the dollar means a weaker currency.
The move could prompt central banks in the Asia Pacific region to explore cutting interest rates. On Wednesday, three central banks in the region reduced rates in a move that was widely seen as a defensive attempt to shore up their economies as the trade war threatens global growth. Central banks in India, Thailand and New Zealand cut interest rates in a cascade of surprise moves that set off currency markets.
"If the yuan, or when the yuan, falls significantly more, we should expect more monetary easing to offset what is a deflationary impulse for a lot of Asian countries and to restore some competitiveness," said George Magnus, an associate at Oxford University's China Center.
The Trump administration labeled China a currency manipulator Monday in the United States. But many economists and investors believe China in effect is loosening controls of its currency.
China kept its currency weak a decade ago to help its exporters, long prompting complaints from the United States and Europe. But in recent years, China's currency has strengthened to a level widely believed to be close to fair value. Today, as China's economic growth has slowed and the trade war has pinched its manufacturing sector, many economists believe the country's currency should be weakening versus the dollar.
