InvestorQ : Why the weakening of the Chinese Yuan during the week is worrying world markets so much? What exactly has China done and why?
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Why the weakening of the Chinese Yuan during the week is worrying world markets so much? What exactly has China done and why?

Answer
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1 year ago


The People’s Bank of China (PBOC), which is the Chinese equivalent of India’s RBI, did something that global markets were expecting for a long time. The PBOC allowed the Yuan to slip below the CNY7/$. For China, it was a logical response to the US move to raise tariffs by 10% on goods worth $300 billion. China has been paying a steep price for the US punitive tariffs in the form of a slowdown in demand and loss of jobs. They had to compensate for the higher tariffs in some way and they opted to weaken the Yuan. When Yuan weakens, exports become cheaper and demand is restored.

How does the PBOC handle the Yuan value?

The PBOC normally keeps the Yuan in a range. You may recollect that there was a brief correction in the Yuan in 2015, which had impacted all the EM currencies. The fall in the Yuan was much sharper this time around, going beyond the CNY7/$ for the first time in the last 10 years. The last time this level had been breached was during the peak of the financial crisis in 2008. The Yuan did not stop at 7/$ but inched closer to the 7.1 mark. However, better trade surplus data from China and US threats of classifying China as a Currency Manipulator led to the Yuan gaining some strengthening towards the latter half of the weak. A currency manipulator tag would open the Chinese currency and its businesses for punitive action on its currency and the cost could be huge. For China, the only way to arrest the slowdown that tariffs were causing in China was to let the Yuan weaken. This would compensate for the higher costs and ensure that the Chinese exports engine does not get impacted materially.