Markets are watching China’s monetary policy as yuan hits 4 month low
May 15, 2019 (China Knowledge) - China’s currency dip to its lowest level in four months since the United States announced 25% tariffs imposed on China’s goods in the latest Sino-US trade tension. This trend was said by currency market watchers as Beijing may be tolerating to prop up exports.
The People’s Bank of China, on Tuesday, held their central parity rate of RMB, essentially yuan reference rate at 6.8365 to the dollar. This is the weakest since January.
On Monday, the offshore renminbi fell to 6.91 per dollar at one point. The yuan’s selloff may have led to PBOC’s Tuesday fixing. This was seen as the central bank’s lenient stance on yuan weakness.
“A weak yuan partly offset the impact of punitive tariff imposed by the U.S. on China last year,” said Wang Youxin, Bank of China researcher. Last year, yuan strengthen against the dollar at 6.2 yuan. The yuan depreciated just as trade tension rose.
There is also speculation on whether China will cut their holdings of U.S. Treasuries, after Monday tweet from Hu Xijin, editor-in-chief of the Global Times newspaper.
"China may stop purchasing US agricultural products and energy, reduce Boeing orders and restrict US service trade with China," tweeted Hu. "Many Chinese scholars are discussing the possibility of dumping US Treasuries and how to do it specifically."
Both countries have different options in the latest round trade war retaliation. China is vulnerable to U.S. trade tariffs since the Chinese exports far more in goods to the U.S. than it imports. However, China has the upper hand when it comes to the money market. China is the world’s largest holder of Treasuries, at USD 1.1 tln.
If China decides to dump their U.S. treasuries, it will result in upward pressure on American interest rates. Resultantly, higher interest rates result in higher borrowing costs and economic slowdown.
On the other hand, should Beijing continue to tolerate a weak yuan, an overly cheap yuan will trigger worries over capital flight. This monetary policy will lower global investor’s confidence on yuan and impede the currency’s internationalization.
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