Cheaper yuan hurts US businesses that sell to China

The political backlash on currency is concentrated in states reliant on automobile manufacturing, steel production and other heavy industry.

The worldwide Monetary Fund said on Wednesday that China’s move to change the mechanism for setting its daily yuan guidance “appears a welcome step” as it should allow market forces to have a greater role in determining the exchange rate. The yuan’s slide to a three-year low instantly rippled across the world. A cheaper yuan also hurts U.S. manufacturers that want to sell to China and makes U.S. goods more expensive in relation to Chinese imports. Exports in July plummeted by an unexpectedly steep 8.3 percent from a year earlier. Amid more evidence of export weakness, the central bank also stunned markets by devaluing the yuan on Tuesday.

The move was inevitable as China’s economy continued to be buffeted by faltering export growth and falling internal consumption.

Yet many economists cautioned against perceiving Beijing’s move mainly as an effort to benefit its exporters at the expense of overseas competitors.

The Treasury Department, which has declined to label China a currency manipulator since 1994, took a wait-and-see approach given recent commitments from top Chinese officials to transition to a more market-oriented exchange rate with more transparency. “It is a small step forward to accommodating market forces”, said Sung Won Sohn, an economics professor at the California State University’s Smith School of Business.

The yuan, also known as the renminbi, is allowed to fluctuate in a band 2% above or below a rate set by the People’s Bank of China based on the previous day’s trading. The centre of Tuesday’s trading band was set 1.9 per cent below Monday’s level.

“The yuan will devalue further over the balance of the year”, said Guy Haselmann, head of U.S. interest rate strategy at Bank of Nova Scotia in New York.

If the Chinese central bank follows through with this, today’s fixing rate is likely to involve a further 1.5 to 2 per cent drop in the yuan (based on yesterday’s closing spot rate).

China devalued the yuan by almost 2 percent on Tuesday in an attempt to prop up its flagging economy.

The big question now for emerging markets, where economic growth has slowed and capital flight has increased, is whether their officials respond to China’s move in kind.

A persistent export surplus, large foreign exchange reserves, low inflation, a moderate fiscal deficit and government debt will ensure a stable currency, he added.

In a statement, Sen. A determined group of lawmakers-mostly Democrats-has vowed to fight the Pacific deal unless it includes measures to crack down on alleged currency manipulation among Asian trading partners.

“While it is too early to judge the full implications of the change…”

The economy grew only 7 percent in the second quarter, but in line with the government’s target of about 7 percent growth for this year.

The Bank of Japan’s latest wave of money printing was also designed to weaken the yen.

But the PBoC will likely resist any major fall in the exchange rate to the US dollar – and it certainly has the firepower to do so – as that could create a vicious cycle of depreciation/devaluation expectations, risking massive capital outflow. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information. They produce all the things that we can’t produce. Because of the volume of reader comments, we can not review individual moderation decisions with readers. “We maintain a cautious view on both the currency and fixed income”, said Citigroup in a note yesterday.

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