In Allowing Yuan to Devalue, China Policy Makers Concede Economy Needs a Boost
The case for a weaker currency is clearer as the country’s growth has downshifted
SHANGHAI—China’s abrupt devaluation of the yuan this week is an acknowledgment from Beijing that its domestic economy needs help, a vulnerability that Chinese policy makers have played down during the escalating trade conflict with the U.S.
The yuan’s slip to below 7 per U.S. dollar put the Chinese currency at its weakest point since 2008—and aligned it closer to economic trends that have pushed growth near quarter-century lows. The currency’s fall of about 3% Monday in offshore trading hit global markets hard as investors concluded Chinese policy makers, who influence the yuan’s exchange rate, might be giving up hope of putting to rest a trade fight with the U.S. that has dented global commercial confidence.
A steadying in the yuan around the 7 rate by midweek helped calm markets.
The case for a weaker Chinese currency has become clearer as the country’s growth has downshifted, economists said, but fundamentals took a back seat to political decisions to preserve the yuan’s strength during the highly charged U.S. trade negotiations. The dollar has gained ground against China’s yuan amid the dispute, just not as quickly as it has against many other currencies.
While top government officials in Beijing sought to build goodwill with the U.S. administration, China’s central bank has “been leaning against the wind” by resisting downward forces hitting the yuan, said David Loevinger, a managing director of California-based TCW Group Inc., who formerly represented the U.S. Treasury in Beijing.
A weaker economy tends to lessen demand for a currency, and on this basis the yuan has been overdue for a slide, economists said.
Battered exporters in China should welcome even a small devaluation if it makes their products cheaper for foreign buyers, analysts said. The currency adjustment may also give pause to companies hoping to sell bonds overseas to avoid what would be higher costs of repayment.
Apart from angering the U.S., Beijing’s primary risks now, analysts said, are undermining confidence in the country’s currency and building expectations among consumers and businesses that it has much further to fall. So, while analysts forecast more yuan weakness, they doubt Beijing will push it significantly lower.
Hours after China’s currency move Monday, the U.S. Treasury labeled Beijing a currency manipulator, a largely symbolic designation that triggers a request for the International Monetary Fund to investigate. The IMF hasn’t commented, but in writing about trade tensions last month, a senior economist there, Gita Gopinath, credited China for “greater exchange rate flexibility and the associated real appreciation over the last decade.”
Beijing also pointed to past strength in the yuan in rejecting the manipulation assessment, saying it has risen about 40% since 2005. China’s central bank cited trade factors in explaining the yuan’s slip Monday.
A weaker Chinese currency is welcome news for tableware maker Langfang Jinheng Stainless Steel Products Co. in the northern province of Hebei.
Manager Liu Jifeng said the exchange-rate adjustment could help lower the export prices of its forks and spoons in the U.S. The company expects prices of these products to rise in the U.S. if President Trump follows through on a plan he announced Friday to impose 10% import tariffs on more Chinese products on Sept. 1—the threat that appears to have triggered Beijing’s looser control of the yuan Monday. “All we can do is to limit possible damage,” Mr. Liu said.
Trade remains critical to China’s economy, even as policy makers boast that domestic consumption contributes almost two-thirds of its economic growth. Net exports globally were still worth about a fifth of the 6.2% growth China recorded for the first half, even though in the U.S., Mexico displaced China as the No. 1 trade partner. “It should be exporting more, and would be but for U.S. protectionism,” Columbia University economist Jeffrey Sachs said in an email.
China is expected to report exports dropped 2% in July from the year earlier when data are published Thursday in Beijing, following a 1.3% pullback in June, according to economists polled by The Wall Street Journal. Likewise, imports probably slid 9% last month, a reflection of cooling domestic activity, and worse than the previous month’s 7.3% drop, according to the estimates.
U.S. policy toward China may have been the determining factor in the yuan move this week, but the backdrop is the economic cool-down, such as a slumping outlook for exports and rising domestic financial risks, says Zhang Ming, a researcher at Chinese Academy of Social Science, a state-backed think tank in Beijing.
“If the U.S. continues to escalate trade frictions, it can’t rule out the possibility for Chinese government to let the yuan weaken upon market pressure so as to help exporters to offset higher tariffs,” Mr. Zhang said.