China’s currency has dropped 3.7 per cent against the dollar in August, putting it on track for the biggest monthly fall in more than a quarter of a century as Beijing hunkers down for a protracted trade war with the US.
Beijing had allowed the currency, which it controls through a managed float, to fall to Rmb7.1494 a dollar by early Friday, with analysts expecting further weakness in the months ahead as policymakers seek to make Chinese exports more competitive and to partly blunt US tariff rises.
“China is really now taking a long-term perspective,” said Yi Xiong, an economist with Deutsche Bank. “They don’t think [the trade war] is something that can actually be resolved in the short term.”
The currency’s fall may draw the ire of Washington, which this month officially labelled China a currency manipulator. But it will also help mitigate the impact of US tariffs, which have expanded to cover virtually all goods imported from China.
Economists at Capital Economics estimated this month that a 10 per cent fall against the dollar for the renminbi would boost economic growth by 0.2 per cent, helping to offset a cumulative drag of 0.8 per cent from existing and planned US tariffs.
Beijing this month allowed the currency to cross the threshold of seven to the dollar for the first time since the global financial crisis after US president Donald Trump announced a duty of 10 per cent on the $300bn of imports from China that were not already facing tariffs.
Mr Trump has continued to escalate the trade war, last Friday promising to raise that 10 per cent tariff to 15 per cent as well as increase existing tariffs on another $250bn worth of Chinese imports from 25 per cent to 30 per cent.
Despite the escalating trade war, few analysts are forecasting a sharper immediate fall for the onshore renminbi exchange rate, which trades 2 per cent on either side of a daily midpoint set by the People’s Bank of China.
Instead, they expect the central bank will let markets steadily weaken the exchange rate, occasionally stepping in with a firmer midpoint fix when bets against the currency threaten to raise any concerns about financial panic or capital flight.
The offshore renminbi, which is not limited by a trading band, has dropped 3.4 per cent against the dollar this month to Rmb7.1532.
The monthly fall for the onshore rate is the largest since China unified its official and unofficial, or market, exchange rates in 1994, which effectively halved the currency’s official dollar value.
China abandoned its currency peg and moved to a managed floating exchange rate regime in 2005.
Frances Cheung, a strategist at Westpac, said the renminbi’s August drop was partly a matter of catching up with earlier falls for other Asia-Pacific currencies as China’s central bank stepped back to allow a “gradual upward grind” further above the Rmb7 per dollar mark.
Ms Cheung said while China’s currency was “particularly resilient” before August, “with the escalation in trade tensions, there is less incentive to prevent the renminbi from weakening”.
But for Beijing, domestic concerns might stave off another month of record depreciation of the renminbi, said Christy Tan, head of Asia markets strategy and research at NAB.
Ms Tan, who expected the exchange rate to end 2019 at Rmb7.40, said the near-term focus for policymakers was the weeklong holiday for China’s National Day on October 1.
The holiday, she said, would serve as “a window to showcase China’s strength and also its unity in social, political and economic issues — which also means keeping everything stable, including sentiment for the renminbi, is paramount”.