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Chinese yuan falls again

By David Morrison  |  18/10/2018 15:08

China’s yuan slid overnight. This comes despite US Treasury backing off from accusing the Middle Kingdom of currency manipulation and ahead of tomorrow’s GDP update

The onshore yuan (the official measure of China’s currency) has just closed out at its lowest level against the US dollar since January 2017. The USDCNY ended this morning’s Asian Pacific session at 6.9386, as the dollar strengthened. But the offshore rate (USDCNH) has continued to push higher, at one point briefly topping 6.9500 in European trade.
The decline in the yuan follows the release of the US Treasury’s latest biannual FX report. The Treasury held back from designating China as a ‘currency manipulator’ – something which one would have expected to support the yuan. However, traders reacted to a specific section in the Executive Summary which focused exclusively on China and which noted that: “…China is not resisting depreciation through intervention as it had in the recent past.” The takeaway from this is that, amid the ongoing tariff tit-for-tat, the US is paying close attention to the Chinese authorities’ apparent ‘benign neglect’ of the currency.

That China should be standing aside as the yuan weakens, while the US emphasises it is cognisant to the fact, is hardly a surprise. After all, since April this year yuan has depreciated by 10% against the dollar, making China’s exports cheaper and effectively offsetting the 10% tariffs on US imports from China. This will be a frustration to President Trump who has been boasting that the US is winning the tariff battle, pointing, as evidence, to the outperformance of US equity markets when compared to China’s. The Shanghai Composite came under further pressure last night, ending the session down 2.9% to hit its lowest level in close to four years. It is now down around 30% from this year’s January high. In contrast, the S&P 500, even after its recent slump, is down less than 3% over the same period, having hit a fresh record just last month.

Previously, the Chinese authorities have proved to be extremely proactive in stepping in to shore up their markets. Just over a week ago the People’s Bank of China (PBOC) cut the reserve requirement ratios (RRR) to the banking sector, thereby injecting over $100 billion into the banking system. The fact that this has had little effect has raised fears that the authorities are losing control, and this is contributing to a lack of confidence. This has been made even more acute as many large Chinese investors have put up their shareholdings as collateral for personal loans. As stock prices fall, then margin calls result which begat further selling. The question now is if the authorities will unveil more drastic measures to support risk assets? If this isn’t forthcoming, then we could see concerns escalate and spread to affect the wider world. Given the worries that investors already have over the US/China trade dispute, tighter monetary policy from the Federal Reserve, the tangled mess in Europe with Brexit, political upheaval, Italian and Spanish budget-busting deficits, rising bond yields and the danger of a rising dollar, then there’s a strong argument for some de-risking on market bounces.

Overnight we’ll get the latest update on Chinese GDP. This is expected to slip to +6.6% year-on-year, down from +6.7% in the last quarter. Fixed Asset Investment is expected to hold steady at 5.3% from a year ago while Industrial Production is forecast to come in at +6.0% year-on-year, a slight decline from +6.1% previously.
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