China’s yuan reaches weakest level in over a year

Market Trends - 25/07/2018

China’s yuan fell to a 13-month low on Tuesday amid the continued US-China trade war that could eventually slow growth in the world’s second largest economy. The currency slid 4% against the dollar so far this year and is also underperforming its peers. The onshore yuan was at 6.8073 to the US dollar on Tuesday, its weakest level since June 2017.

It seems that the Chinese authorities were in no hurry to prop up the currency, showing greater tolerance for further downside. This has sparked speculation that China is using depreciation to cushion the impact of US tariffs.

However, it is unlikely that we will see China resorting to a 2015-style devaluation that spooked markets and led to a capital flight due to lack of market confidence in China’s policy framework. Beijing has policy tools at its disposal to prop up the economy, with potential for more monetary easing and fiscal spending. There are growing expectations for the Chinese authorities to loosen monetary policy after the Beijing government announced on Monday that it would pursue tax cuts and other expansionary measures.

Compared to the panic selling after the Chinese yuan fixing reform in 2015, this time capital outflows will likely be limited while China is enjoying the advantages of a weaker currency.

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