Yuan at right level, disorderly capital flows unlikely

by REUTERS/ pic by BLOOMBERG

BEIJING • China’s yuan is at an appropriate level currently and two-way fluctuations in the currency will not necessarily cause disorderly capital flows, a senior official at the People’s Bank of China (PBoC) told Reuters yesterday.

The yuan has weakened nearly 2.4% since US President Donald Trump threatened early this month to impose more tariffs on Chinese goods from Sept 1, though there are signs China is trying to stem the declines.

“The current level of yuan exchange rate is appropriately aligned with fundamentals of China’s economy and market supply and demand,” Zhu Jun, head of the central bank’s international department, said in an interview with Reuters.

Zhu said China was “shocked” by the US Treasury Department’s move last week to label China a currency manipulator, hours after Beijing let the yuan slide past the key seven per dollar level to its lowest level since the global crisis.

But Zhu asserted that China will be able to “navigate all scenarios” arising from the Trump administration’s decision to label it a currency manipulator for the first time since 1994, which rattled global markets.

China is unlikely to face serious consequences from getting that label given the apparent lack of Group of Seven (G7) and International Monetary Fund support for Washington’s move, former and current US and G7 officials said.

But some Chinese advisors and former officials have sounded alarm bells over a possible wider conflict between China and the US.

The year-long trade war between the world’s two largest economies has already spread beyond tit-for-tat tariffs on goods to other areas such as technology and currency.

The real aim of the US currency manipulator label is to disrupt China’s financial markets and its economy, said Chen Yuan, former chairman of the China Development Bank — the country’s biggest policy bank.

“The US step to list China as a currency manipulating country is an important action to upgrade the trade war into a financial war,” Chen, who remains an influential figure on economic issues, told a forum over the weekend.

Zhu of the central bank told Reuters that in the short run, external shocks will play a role by influencing the yuan’s movements.

“That said, as long as the yuan moves in an orderly manner based on market supply and demand, such movements in either direction do not necessarily mean disorderly movement of capital flow,” she said.

Zhu reiterated that the recent yuan volatility is a normal market reaction to escalating trade tensions, adding that “if it’s preventing such responses that would constitute real manipulation”.

Analysts said a weaker yuan could help China’s ailing exporters to cope with higher US tariffs amid an escalating trade war, but any sharp yuan drops could fuel capital outflows as the world’s second-largest economy faces increased headwinds.

Chinese leaders have repeatedly pledged that they would not resort to competitive currency devaluation to support exports, or use the currency as a tool to cope with trade disputes.

Zhu said the yuan will be supported by China’s solid economic fundamentals, a stable debt ratio, contained financial risks, adequate foreign- exchange reserves, and favourable interest rate spreads between China and major advanced economies.

“Over the medium and long term, we have full confidence in the yuan as a strong currency,” she said.

In the second quarter, China’s annual economic growth pace slowed to a near 30-year low of 6.2%.