The health of China's economy could be hit by a falling yuan. Image: iStock

For the past 72 hours, China has condemned and then denied claims by US President Donald Trump that Beijing is deliberately “manipulating” its currency.

On Friday, the People’s Bank of China set the official yuan rate at 7.0136 to the US dollar after Monday’s breach of the sensitive seven-to-one ratio.

“China employs a managed floating exchange rate system that is based on market supply and demand and in reference to a basket of currencies. There is no such thing as currency manipulation [on the part of China],” the de-facto central bank said in a statement earlier this week.

Since the yuan is still not freely convertible, the PBOC sets a 2% range against the greenback on a daily basis. Friday’s rate dipped below the previous lowest point, which was recorded on April 3, 2008, during the height of the global financial crisis.

Although China’s Central Bank Governor Yi Gang has made it clear that the world’s second-largest economy would “not engage in competitive devaluation,” Trump has wasted no time in branding Beijing a “currency manipulator” as the trade conflict morphs into an economic Cold War.

Still, moves by President Xi Jinping’s administration to effectively devalue the yuan in an escalating US dispute is fraught with risks. While it will help offset Washington’s latest round of tariffs on Chinese exports worth US$300 billion, it could damage Beijing’s efforts to shore up its slowing economy.

The new duties are due to kick in on September 1 after earlier tit-for-tat tariffs in the year-long row.

Data dump

“We don’t think … [the central bank] will let the yuan wantonly weaken as a significant depreciation could have severe and destabilizing effects on the domestic economy,”  Stephen Innes, a managing partner at VM Markets in Singapore, told the AFP news agency.

As for the broader picture, a data dump this week revealed cracks in the economy.

Figures released by the National Bureau of Statistics on Friday showed that factory price inflation dropped below zero for the first time since 2016.

The producer price index, which is an important barometer of the industrial sector and measures the cost of goods, fell 0.3% in July from the previous month’s 0%.

In part, this is a reflection of sluggish demand and it could dent corporate profits, triggering a dip in prices globally.

“The profitability for industrial firms will take a hit and the broader outlook will continue to slump,” Edward Moya, an analyst at the global forex group OANDA, said.

At the same time, food prices jumped 9.1% last month compared to the same period in 2018. Soaring pork prices sparked by the African swine fever outbreak were blamed for distorting the numbers.

Up to 200 million pigs could die, or be culled, in China this year after contracting the disease. If that happens, pork prices could soar by 70%, according to a senior Chinese official who declined to be named.

Price hike

In March, a report by Nomura backed up that assessment. The Japanese bank warned that costs could rise to 33 yuan ($4.90) per kilogram by January 2020 from February’s figure of 18.5 yuan-per-kilogram. That would represent a 78% price hike.

“Despite the rise, pig farmers may be reluctant to increase hog stocks on concerns about [African swine fever],” Nomura’s analysts said in the study.

At least China’s trade data has helped pierce the gloom. On Thursday, the General Administration of Customs reported that dollar-denominated exports in July increased 3.3% year-on-year, although imports plunged 5.6% during the same period.

The highly contentious trade surplus with the US came in at $27.97 billion which was lower than June’s figures of $29.92 billion. Overall, it was $45.06 billion.

“Exports still look set to remain subdued in the coming quarters as any prop from a weaker renminbi [yuan] should be overshadowed by further US tariffs and broader external weakness,” Julian Evans-Pritchard, a senior China economist with Capital Economics, said.

“August exports may benefit from some front-loading before the new tariffs go into effect on September 1, this bump will probably be smaller than it was ahead of earlier rounds of tariffs as US port storage facilities have little spare capacity,” he added in a note. “Meanwhile, a renewed slowdown in domestic demand looks set to weigh on import volumes.”

It will also have a major impact on the global economy which has already been buffeted by a virulent trade war with no antidote in sight.

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