Exclusive: China to tolerate weaker yuan,
wary of trade partners' reaction - sources
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[June 30, 2016]
By Kevin Yao, Nathaniel Taplin and Lu Jianxin
BEIJING/SHANGHAI (Reuters) - China's
central bank is willing to let the yuan fall to 6.8 per dollar in 2016
to support the economy, which would mean the currency matching last
year's record decline of 4.5 percent, policy sources said.
The yuan is already trading at its lowest level in more than five
years, so the central bank will aim to ensure a gradual decline for
fear of triggering capital outflows and criticism from trading
partners such as the United States, said government economists and
advisers involved in regular policy discussions.
Presumptive U.S. Republican Presidential nominee Donald Trump
already has China in his sights, saying on Wednesday he would label
China a currency manipulator if elected in November.
Investors keep a close watch when the yuan is in decline. A surprise
devaluation of the yuan last August sent global markets into a spin
on worries the world's second-biggest economy was in worst shape
than Beijing had let on, prompting massive capital outflows as
investors sought safe havens overseas.
"The central bank is willing to see yuan depreciation, as long as
depreciation expectations are under control," said a government
economist, who requested anonymity due to the sensitivity of the
"The Brexit vote was a big shock. The market volatility may last for
Other emerging market currencies have also fallen in the wake of
Britain's vote to leave the European Union, but the yuan is the
weakest major Asian currency against the dollar this year.
The currency <CNY=CFXS> fell as low as 6.6549 per dollar following
the Reuters report, near a 5-1/2 year intraday low on Monday.
State-owned banks were suspected of intervening to sell dollars,
currency traders said.
At the low, the yuan had fallen about 2.4 percent this year.
After the report, the People's Bank of China, the central bank, said
China had no intention to promote trade competitiveness through
depreciation of the yuan, a comment that has also been made
repeatedly by Chinese Premier Li Keqiang.
Without citing any media by name, it said on its website that some
media continuously published "inaccurate information" on the yuan's
exchange rate. These reports interrupt the normal operation of the
market and help "speculative forces" short - or bet against - the
yuan, it said.
Currency dealers said the dollar's strength and weakness in China's
economic growth, which hit a 25-year low in 2015, justified a
decline in the yuan.
But a significant decline is likely to leave investors and trading
partners concerned in the wake of August's devaluation and another
sharp decline in the currency over a matter of days in January,
which analysts said was engineered by the central bank.
In the past decade, China has also faced criticism from Western
lawmakers who say it held back the appreciation of the yuan.
Earlier this month, U.S. Treasury Secretary Jack Lew said it would
be "problematic" if the yuan only went down over time and Trump has
said he would take a hard line on trade disputes with China if
Labeling China a currency manipulator "should've been done a long
time ago," he said on Wednesday.
China's Foreign Ministry said on Wednesday the exchange rate was not
the reason for unbalanced trade with the United States, which runs a
goods and services trade deficit with China.
However, the sources acknowledged the diplomatic risks of a steep
fall in the yuan.
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Chinese 100 yuan banknotes are seen on a counter of a branch of a
commercial bank in Beijing, China, March 30, 2016. REUTERS/Kim
"The pressure from the United States could rise if China allows
sharp depreciation," said a government source.
China has the biggest global exports market share of any country
since the United States in 1968, so the yuan's exchange rate acts as
a bellwether for other exporting countries.
While a South Korean finance ministry official said "we are
concerned" about the yuan's slide, a person familiar with Japan's
currency diplomacy said the yuan's decline didn't seem out of line
considering the dollar's strength.
"I don't think Japan has much to complain about," this official
The officials of these major exporters declined to be identified
given the sensitivity of the issue.
"We should gradually let market forces play a bigger role. The
market believes that the yuan is under pressure, so our foreign
exchange policy should follow this trend," said a researcher with
the Commerce Ministry.
"China needs to safeguard its economic growth and trade but also
make sure we don't create competitive devaluation."
Julian Evans-Pritchard, China economist at Capital Economics, said
in a note last week that a sharp fall "could set off a renewed bout
of fears over renminbi depreciation and a pick-up in capital
outflows." The yuan is also known as the renminbi.
But he said the central bank would want to avoid "panic" so was
likely to intervene to stabilize the currency if need be.
The PBOC has been trying to reform the way it manages the yuan by
making it more market-driven and transparent.
It sets the yuan's daily mid-point versus the dollar based on the
previous day's closing price, taking into account changes in major
currencies, analysts and officials said.
This year, the PBOC has been guiding the yuan lower by pegging it to
the dollar when the U.S. currency weakens and pegging it to a basket
of currencies when the dollar rises, they said.
The currency regime gives the central bank more room to allow
two-way swings in the yuan versus the dollar, deterring one-way bets
on the currency.
The CFETS RMB Index, a trade-weighted exchange rate index that was
unveiled by the central bank in December, fell 5.6 pct between the
end of 2015 and June 24 of this year, although the central bank has
pledged to keep the yuan basically stable against the basket.
(Reporting by Kevin Yao and monitoring desk in BEIJING; Nate Taplin
and Lu Jianxin in SHANGHAI; Leika Kihara in TOKYO and Christine Kim
in SEOUL; Editing by Neil Fullick.)
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