China's currency weakened by 0.15 percent against the dollar on Tuesday. It was a decline that – on its own – seems little remarkable.
But as the Washington-Beijing trade war diminishes, the value of renminbi is increasingly at the core of the global struggle for trade, technology and economic dominance between the world's two largest economies.
Lately, even minuscule moves are beginning to increase.
Tuesday's dip pushed the currency to its weakest level against the dollar since early 2008, according to data from FactSet. Since the Trump administration began talking about introducing Chinese export tariffs in early 201
The weakening of the currency helps China to offset the effect of US tariffs on its products. When the renminbi crossed $ 7 a month this month – a symbolic level that the Chinese government had long kept from crossing – the move was seen as a deliberate effort by Beijing to blunt the Trump administration's stated goal of cutting the US & # 39; trade deficit with China.
But the fall also reflects uncertainty about what China's economy is facing, as the global trading system it relies on is thrown into chaos by the trade war. And there is evidence that Beijing has been trying to support the currency rather than drastically weakening it.
"China's business relationship with the rest of the world is changing," said Ben Emons, Managing Director of Global Macro Strategy for Medley Global Advisors. "There is less demand for Chinese goods and less demand for the Chinese currency."
By definition, any analysis of the movements of China's currency is partly a guessing game. Chinese decision makers with authority over the yuan are not particularly transparent about their intentions.
But it also becomes clear that despite China's economic firepower and technical expertise in managing the economy, the trade war is changing the economic globalization system that enabled the country's rise.
Large-scale economic factors are also at stake
China puts a daily "fix" around which currency can trade, but the falling value also reflects a number of major economic factors that will affect any exchange rate: economic growth, interest rates and trade balances.
In China, many of the economic vital signs have been weakened lately, most likely as a result of the spiraling struggle for tariff rates. Growth is clearly declining, and interest rates are largely expected to fall as the government tries to keep alive the country's expansion.
And then there are the tariffs themselves. Economic theory has long predicted that tariffs will result in a weakening currency for relatively simple reasons: They are designed to cut exports of the country they are imposed on, in this case China's exports to the United States.
If they work, and there is some evidence that US manufacturers are changing orders to Vietnam and other countries, that means less demand for Chinese products, and therefore less demand for the country's currency.
A vicious cycle may follow a falling currency
The outlook for the economy may also cause some global investors to withdraw money from China.
More than $ 60 billion fled China in May and June, the last few months data available from the Institute of International Finance, a banking group that tracks cash flows to emerging markets.
A debilitating yuan in itself can also stimulate capital outflows from wealthy Chinese seeking to protect their savings against devaluation.
Such outflows can be difficult to control, forming a feedback loop where downward pressure on a currency leads to more sales as more investors rush to make money from their Chinese investments. In doing so, they convert their renminbi into financial markets, effectively selling the Chinese currency – weakening it – and buying dollars, yen or euros.
China's stock of dollars is another clue
Another clue that the falling currency does not quite do Beijing is that the stock of dollars has not grown very much.
Because China sets a narrow price range for the currency, it must intervene in markets to keep it within this range. If the renminbi becomes too weak, the central bank will use some of its dollars to buy the currency.
Conversely, when Chinese authorities try to keep the country's currency cheap, they print it and use it to buy dollars. The result for the Chinese is both a weaker currency and a large stock of US dollars.
And for decades, as the Chinese kept their money artificially cheap to give their exporters an advantage, the country's stock of dollars rose.
But in recent years, something has changed. As China's growth is now declining, the currency has weakened. At the same time, China's stock of dollars has fallen, which means that China is effectively selling dollars and buying yuan in an effort to keep the currency stronger.
This means that as far as we know, China has not tried to weaken its currency by intervening in the markets. It is worth noting that public data on the central bank's dollar portfolio is only available through June, so this view may well change as more information becomes available.
However, the sharp fall in the yuan this month also suggests that China is not & # 39; Don't spend too much of their money trying to fight the market forces trying to get the currency down in value.
So across Wall Street, analysts expect China's currency weakness to continue alongside the trade war.