Yuan Watchers Say 7 Is No Longer a Sticking Point for China
Chinese one-hundred yuan banknotes are arranged for a photograph in Hong Kong, China. (Photographer: Xaume Olleros/Bloomberg)

Yuan Watchers Say 7 Is No Longer a Sticking Point for China

(Bloomberg) -- Yuan watchers arguing that China shouldn’t be scared of the currency breaking 7 a dollar are being emboldened by a former central bank official’s support for their thesis.

In the four days since ex-governor Zhou Xiaochuan dismissed the importance of 7, at least six analysts published reports laying out why the People’s Bank of China is likely to tolerate a weaker yuan. They say policy makers are more likely to prioritize supporting economic growth amid a worsening standoff with the U.S. over trade. The yuan was 0.1% weaker at 6.9075 per dollar Tuesday.

The yuan has stabilized in recent weeks as authorities voiced support for the currency, following a rapid sell-off that pushed it near a level not breached since the global financial crisis. It still lost about 2.5% in May, the worst in Asia, even with current PBOC Governor Yi Gang downplaying the risk of further depreciation. Growing conviction that the Federal Reserve will cut interest rates may also help relieve some of that pressure.

“Allowing greater flexibility in the yuan is good for monetary policy,” said Nie Wen, an economist at Huabao Trust Ltd. in Shanghai. “It creates more room for China to deal with its domestic problems.”

Yuan Watchers Say 7 Is No Longer a Sticking Point for China

A rate weaker than 7 per dollar is no longer a “forbidden zone” for China’s yuan, said Wan Zhao, an analyst at China Merchants Bank Co. A break below that level can actually help reduce the pressure on Chinese exporters if the U.S. raises tariffs on more goods, he said.

Click to Read: Weaker Chinese Economy Needs Flexible FX, Yu Yongding Says

Chinese authorities are preparing more policy tools to retaliate against the U.S. should tensions escalate further. They’ve announced plans to blacklist certain foreign companies and have threatened to restrict exports of rare earths -- a group of materials that are used by U.S. companies in everything from electric cars to high-tech military equipment.

Edmund Goh, an Asia fixed-income fund manager at Aberdeen Standard Investments in Shanghai, also said 7 “isn’t a must-defend level” for China.

“It’s not the absolute number that matters, but the speed of depreciation,” he said.

While a weaker yuan could benefit China’s economy, analysts said it may not come imminently, unless growth worsens rapidly. A much weaker currency would also run the risk of incurring U.S. accusations that China is deliberately pushing down its value in order to offset some of the impact of the tariff war. China’s Xi Jinping will meet U.S. President Donald Trump at the Group of 20 summit later in June.

“We think it’s hard for the yuan to break 7 in the short term, but still need to watch the economic fundamentals and tariff policies’ impact on balance of payments in the mid-to-long term,” said Ming Ming, chief fixed-income analyst at Citic Securities Co. in Beijing.

©2019 Bloomberg L.P.

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