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Yuan Depreciation Is Market Driven

In addition to China, many emerging economies have seen their currencies depreciate after failed attempts to defend them
The yuan’s reference rate against the US dollar on Friday weakened by 605 basis points to 6.767, data from the PBOC said.The yuan’s reference rate against the US dollar on Friday weakened by 605 basis points to 6.767, data from the PBOC said.

China is not manipulating its currency downward to support its exports amid a trade row with the US and the recent depreciation of the yuan has been purely market driven, analysts said late Sunday.   

China wouldn't use yuan depreciation as a weapon to cope with negative effects from the trade tension with the US, said Zhou Yu, director of the Research Center of International Finance at the Shanghai Academy of Social Sciences, Xinhua reported.

"Depreciation of the yuan might offset the influence of higher US tariffs, but it wouldn't do much good for China's economy. It might bring bad consequences like capital outflows. China wants the yuan to be stable and wouldn't want it to depreciate significantly," Zhou said.

His view was echoed by Cong Yi, an economics professor at the Tianjin University of Finance and Economics, who said that it's the US, not the Chinese government, that has caused the yuan to depreciate.

The trade tension has caused a deterioration in China's international trade balance, which has in turn brought capital outflows and depreciation pressure on the yuan, Zhou and Cong both said.

In a twitter post from Trump on Friday, he accused China, the EU and others of devaluing their currencies and lowering interest rates while the US dollar gets stronger, taking away a "big competitive edge" from the US.

But Zhou noted that Trump's views do not necessarily represent the US government's stance. For example, in its biannual report on international exchange rates released by the US Treasury in April, it decided not to label China a currency manipulator.

Tit-for-Tat

A CNBC report on Friday noted that the tit-for-tat Sino-US trade dispute has turned into a "currency war" between the two economies, with both currencies depreciating in recent days.

On Friday, the yuan's reference rate against the US dollar weakened by 605 basis points to 6.767, data from the People's Bank of China, China's central bank, showed.  

On January 2, the first trading day this year, the yuan stood at 6.508 against the US dollar. And the US dollar index edged down 0.72% to 94.48 on Friday.

According to Cong, there is no basis for long-term depreciation of the yuan, as China is making efforts to decrease reliance upon exports and increase dependence on domestic demand. "Besides, US companies are also increasing investment in China amid slumping demand in the US. That trend is irreversible," he said.

In early July, US car maker Tesla signed a deal with Chinese authorities to build a new auto plant in Shanghai, according to media reports.

Zhou noted that it's the US government that's likely to intervene in the currency market to maintain its benefits from the tariff increase on Chinese goods.

Meanwhile, China's Foreign Ministry said on Monday that threats and intimidation on trade will never work on China. The ministry said this in a statement after US President Donald Trump said he was ready to impose tariffs on all $500 billion of imported goods from the country, Reuters reported.

China also has no need to use competitive devaluation of its currency to aid its exports, Geng Shuang, a spokesman for the foreign ministry, told a daily news briefing.

Other Depreciations

In addition to China, many emerging economies have seen their currencies depreciate after failed attempts to defend them. Several countries aggressively borrowed dollars to take advantage of low US interest rates.

But the federal reserve is stepping up the pace of rate hikes, leaving borrowers with a heavier burden, and capital is now flowing out of these countries as investors follow higher yields.

In developing Asia, where many economies managed to weather the currency crisis of the late 1990s, the trade war is compounding the impact. Trade is the lifeblood of Association of Southeast Asian Nations economies, where exports account for as much as 60% of gross domestic product. Despite bloc members' efforts to build up foreign-currency reserves, the Indonesian rupiah has softened 5% against the greenback since April, Nikkei reported.

South Korea, which counts China as a major trading partner, has suffered 6% depreciation in the won. The currencies of Brazil and Argentina have softened drastically against the dollar since April. The Indian rupee and Turkish lira have touched all-time lows against the greenback recently, and their economies have experienced sudden downward pressure, with capital outflows accelerating and inflation observed.

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