On Thursday, China’s yuan dropped to its weakest value against the U.S. dollar since the global financial crisis, marking a significant development in the ongoing trade war with the United States.
The People’s Bank of China (PBOC) cut its yuan guidance for the sixth consecutive trading session, signaling that the currency’s decline is accelerating amid growing tensions between the two global superpowers.
The U.S. had imposed hefty tariffs on Chinese goods, with President Donald Trump recently intensifying tariffs on Chinese imports, even as he temporarily reduced duties on other countries. “The US and China are currently in a power play game of brinkmanship,” stated Chris Turner, ING’s global head of markets. Turner emphasized that until a resolution is reached or a major meeting between the countries is scheduled, the USD/CNY exchange rate will remain in the spotlight for global markets.
Yuan Depreciation Could Ease Tariff Impact but Risks Financial Stability
A weaker yuan can help alleviate the impact of tariffs on China’s exports by making its goods cheaper for international buyers. However, the risk of a sharp currency decline is that it could lead to unwanted capital outflows, destabilizing China’s financial system. Analysts and economists have warned about the potential risks associated with a rapidly depreciating yuan.
In an effort to stabilize the currency, the central bank has instructed major state-owned banks to reduce their U.S. dollar purchases, as reported by sources close to the matter. The goal is to ensure that the yuan does not face sharp declines, which could further erode confidence in Chinese assets.
PBOC Attempts to Manage Yuan Stability Amid Trade War Pressures
The onshore yuan reached 7.3518 to the dollar on Thursday, its weakest level since December 2007. Despite this decline, the People’s Bank of China has set its midpoint at 7.2092, stronger than market projections, which suggests that the central bank is trying to avoid drastic fluctuations in the yuan’s value. Traders and analysts interpret this as an attempt by the PBOC to maintain stability, despite the mounting challenges posed by the ongoing trade war.
Economists at Societe Generale noted that China prefers a gradual depreciation of the yuan, as stability remains essential for maintaining confidence in the country’s financial markets. They highlighted that the ongoing tariffs are significant enough that they cannot be fully offset by currency depreciation alone.
Kosta Gushterov
Reporter at Coindoo
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Source: https://coindoo.com/yuan-hits-lowest-level-since-the-2008-financial-crisis/