Will Chinese Yuan Hit 7 Again?
Goldman Sachs forecasts the yuan reaching 7.1 against the dollar in the next six months, breaching the psychologically important barrier of 7. MK Tang, a senior China economist at Goldman in Hong Kong, said that "we see good economic reasons arguing for a weaker yuan, especially in the coming months," Tang said. "It’s only a matter of time for the yuan to hit 7."
US and China have been locked in an ongoing trade war since the start of the year 2018 as each country has introduced tariffs on goods traded between each other. The Chinese currency Yuan has come under intense pressure to fall as China became loosened its monetary policy to bolster a slowing economy to counter the trade war. As of this week, the currency touched its weakest level in more than a decade and, investors are desperate to find out how far can the Yuan slide. If the currency weakens any further, it could fall below the psychologically important level of 7 renminbi to the dollar. The last time it took more than 7 renminbi to buy a dollar was in May 2008, as the world was slipping into a financial crisis.
The worry is that a break beyond 7 could send the Chinese currency into a vicious cycle in which selling leads to more selling. China’s financial system is firmly controlled by the government and politicians in the United States and elsewhere have long said that China manipulates its currency. The People’s Bank of China (PBOC) has strong incentives to stop such vicious cycles before they start, and has several tools to defend the currency. Indeed, since August, PBOC has periodically used moral suasion, administrative or policy measures to slow the pace of yuan depreciation, catching short-sellers wrong-footed.
On the other hand, China also has good reasons to keep its currency weakening as a weaker currency can also help Chinese exporters beat President Trump’s tariffs. The country’s slowing economic growth, slumping stock market, fragile real estate market in recent years also require a weaker currency to make holding the Yuan more attractive.
Currency market participants are closely watching to see if China’s foreign currency reserves fall below $3 trillion, having slipped to $3.087 trillion last month. The leadership in Beijing has tried to stem capital outflows, which typically accelerate when its currency weakens. While China has not raised interest rates, the Federal Reserve in Washington has and that makes it attractive for many people to sell their renminbi and buy dollars.
The Chinese yuan will likely end the year at 6.95 to the U.S. dollar, according to the median of 31 forecasts in a CNBC survey compiled in August. Should the trade war intensify, China may look to make more aggressive moves with its currency. The spotlight in the foreign exchange market will then fall on how far Chinese authorities will allow its partially convertible currency to depreciate.