Yuan’s midpoint reference weaker than 7 for first time since 2008, may drop further: analysts

By Zhang Hongpei Source:Global Times Published: 2019/8/8 18:48:40

Photo: IC


China's central bank has set the official midpoint reference for the yuan weaker than 7 per US dollar for the first time since 2008.

The central parity rate of the yuan weakened 43 basis points to 7.0039 against the US dollar on Thursday, lower for a sixth consecutive day.

On Wednesday, the central parity rate of the yuan was set at 6.9996 against the greenback, and the onshore yuan ended at 7.0602 per dollar.

The US move to label China as a currency manipulator has no basis and does not accord with the facts, China's foreign exchange regulator said, as reported by the Xinhua News Agency on Wednesday.

Wang Chunying, spokesperson for the State Administration of Foreign Exchange, said on Wednesday that the US action will seriously worsen the global economic and trade environment and hurt global growth.

China will keep its foreign exchange management policies stable and consistent, according to Wang.

"It is the US' escalating trade friction that has affected the exchange rate of the yuan, to which the market has already fully responded," said Wang.

Analysts said the yuan still has room to depreciate toward 7.1 per US dollar, with a fluctuation range between 6.9 and 7.2, while betting on the yuan as a strong currency in the long term.

Mei Xinyu, a veteran analyst close to the Ministry of Commerce, told the Global Times on Thursday that two-way fluctuation is expected to last for quite a while with the central bank reducing its intervention. 

"The currency won't depreciate that quickly to 7.1 or 7.2, and it's hard to stay at either of those two points for any length of time," said Mei. "It won't be long until the yuan strengthens back with rate below 7," said Mei.

The exchange rate change is set to face more uncertainty, said Cong Yi, a professor at the Tianjin University of Finance and Economics.

The yuan's depreciation makes US exports to China more expensive, which will hit the US economy in the short term, Cong told the Global Times on Thursday. In the long run, it is China-US trade relations that affect the exchange rate, not the reverse, he said.

It is likely that the exchange rate of the yuan against the US dollar will pass 7 multiple times within the year, according to a note UBS sent to the Global Times.

If the US does impose tariffs on $300 billion worth of Chinese imports, the exchange rate is forecast to reach 7.2 by the year end, said the note.

IHS Markit chief economist Nariman Behravesh said in an analysis on Thursday that China's recent depreciation is relatively small in the whole scheme of things. If it stops there, and neither the US nor China take any other actions that upset the markets, then this episode will probably blow over. 

"On the other hand, if this is the beginning of a new and dangerous phase of the trade war, then all bets are off, and the ensuing financial firestorm could push the US and global economies into recession," Behravesh said.



Posted in: MARKETS,ECONOMY

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