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Yuan fall: Why is China's currency weakening?



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China's currency has depreciated to its lowest point in more than a decade, asking the United States to label Beijing a currency manipulator.

The US move came on Monday, after the currency fell below 7 yuan to the US dollar for the first time since 2008.

Beijing has previously sought to prevent the currency from slipping below the symbolic level.

The escalation of the trade war, triggered by recent US customs threats, appears to have caused the policy to shift.

On Monday, the People's Bank of China (PBOC) said the decline in the yuan was driven by "unilateralism and trade protectionism and the introduction of tariff increases on China".

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It comes days after US President Donald Trump said he would impose a 1

0% tariff on Chinese goods of $ 300 billion ($ 246 billion), and effectively hit all China's imports to the United States with duties.

How does China devalue its currency?

The yuan does not trade freely, and the government restricts the movement toward the US dollar.

Unlike other central banks, the PBOC is not independent and faces allegations of interference when large value moves occur.

Senior economist Julian Evans-Pritchard, senior economist at Capital Economics, said by linking the yuan's devaluation to the latest tariff threats, the PBOC has "effectively swapped the exchange rate, even though it does not proactively weaken the currency with direct intervention".

What is the effect of a weaker yuan?

A weaker yuan makes Chinese exports more competitive, or cheaper to buy with foreign currency.

From the United States perspective, it is seen as an attempt to offset the effect of higher tariffs on Chinese imports coming to America.

Although it seems like a win for consumers around the world – who can now buy Chinese products cheaper – it carries other risks.

A weaker yuan will also make imports into China more expensive, potentially raising inflation and creating pressures in the already declining economy, as well as forcing currency holders to invest in other assets.

Have they done this before?

Yes. Back in 2015, China's central bank pushed its currency to the lowest rate against the US dollar in three years, in part to cope with growth easing. The central bank said the move was designed to support market reforms.

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Caption

Last month, data showed that China's economy grew at its slowest pace since the early 1990s during the second quarter

The last time the yuan traded at the 7-level against the dollar was during the global financial crisis.

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Capital Economics Evans-Pritchard said that China has long argued the level per dollar is an arbitrary threshold, "but had previously intervened to prevent the currency from breaking this threshold."

Why has it angered the United States?

Making Chinese goods more competitive strikes at the heart of Trump's trade war with Beijing.

The US president has long accused China of devaluing its currency to support exports – allegations Beijing has denied.

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Despite the recent slide in the yuan linked to the trade war, China continued to state it would not participate in "competitive devaluations".

PBOC Governor Yi Gang on Monday said China "China would" refrain from competitive devaluations and will not target the exchange rate for competing purposes. "

Why is currency manipulation so controversial?

Currency manipulation – by China or any other country – is considered to flame global trade rules by providing unfair competitive advantages.

A country does so by artificially inflating or It can be designed to make exports more competitive, to avoid inflation or reduce capital inflow.

A paper by Laurence Howard in the Emory Law Review said that currency manipulation has "serious effects on the global market." [19659005] "Around the world, currency manipulation is possibly responsible for millions of jobs lost in the United States and a smaller but still significant number of jobs lost in Europe," Howard wrote.

What's next for the yuan?

Analysts predicts that the yuan will weaken further. [1 9659005] Oanda market strategist Edward Moya said that continued write-downs in the yuan "should be expected" and that we could "see y another 5% before the end of the year. "

Capital Economics now expects the yuan to end the year at 7.30 per US dollar, compared with earlier forecasts of 6.90.


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