Yuan depreciation not a tactic amid trade tension
This judgment is based on the Chinese economy, which can keep a growth rate of 6-7 percent, an impressive level in a world economy full of uncertainties.
Currently, the yuan to dollar exchange rate has reached 6.9 and is edging closer to 7. There is some panic in the market and differing opinions among market analysts. Some believe the yuan could depreciate further and that the exchange rate could continue fluctuating. But others are betting against this.
It seems that 7 is the watershed level for the market, although some institutions have lowered their yuan forecasts and they now expect the yuan to weaken further against the US dollar.
Even if the China-US trade row gets worse, an exchange rate weaker than 7.5 to the dollar would be an excessive level of depreciation from the normal value. The market may by uneasy right now, but a line can be drawn at 7-7.5. The government and enterprises can use this standard as a guideline to evaluate the future economic fundamentals.
Another question seems to be whether the yuan depreciation could be a countermeasure to alleviate the pressure brought by trade friction.
The China-US trade problem cannot be solved in the near future. Negotiations over the issue could continue for the next 10 years.
The China-US trade friction is likely to continue even after US President Donald Trump is no longer in office. It will be a test for the two countries' resources, patience and willpower.
For China, the real question is reform. The reform and opening-up of the past was externally oriented. Creating a good environment for foreign companies was the top priority. From now on, the reform should be domestically driven, catering to the Chinese people. Some industries need to become more efficient, and the budget in major cities should be put toward economic development.
China has many problems on its plate. Instead of depreciation, a strong yuan is what it needs in the current situation. Depreciation doesn't benefit China. On the contrary, China has incentives to make the yuan stronger.
A strong yuan can provide support for outbound investment under the Belt and Road initiative. It would also help with imports of commodities such as agricultural goods, iron ore, crude oil and coal if the yuan became stronger. It is estimated that China still holds $775 billion in outstanding dollar debt offshore, so yuan depreciation would result in losing more money. Depreciation also challenges the economy by triggering capital outflows. So there is no basis for saying that the yuan is being allowed to depreciate as a tactic amid the trade friction.
The depreciation of the yuan echoes what has happened to currencies in other emerging markets. The US is still seeing robust economic growth and capital inflows, so there is little doubt that the US dollar will continue to strengthen against other currencies. In any case, it's normal for the yuan to depreciate against the dollar. As the downward pressure on the Chinese economy continues, a yuan to dollar exchange rate of 7 to 7.5 would be a reasonable market response.