Trump takes issue with the yuan’s stealthy devaluation and ‘manipulation’. Is he right?

For more than a month, China seemed to be enjoying the advantage of exchange-rate depreciation without the global backlash and panicky capital outflows that accompanied the bout of yuan weakening in 2015. Then Donald Trump took issue.

The US president’s charges that China is “manipulating” a currency that’s been “dropping like a rock” came at the end of a six-week slide in the yuan that took it to its lowest level in more than a year against the dollar. The remarks, in a tweet and an interview with CNBC, suggested to market participants that the US-China trade war is now broadening to include currencies, putting fresh scrutiny on Chinese management of the yuan.

After overseeing a slide in the yuan of almost 5 per cent since mid-June, the question for Chinese officials now is whether to turn to other policy measures to support growth in the face of headwinds to exports. Wang Tao at UBS Group AG is among those predicting China will use other tools than the exchange rate to “cushion the blow” from the trade war.

“The central bank will work to stabilise the currency,” Wang, UBS’s head of China economic research in Hong Kong, said in a Bloomberg Television interview. “So what can China do? At this moment I think they can ease some of the tightening” in credit and fiscal policy, to support infrastructure investment, she said.

China set the reference rate for the onshore yuan at 6.7593 Monday, compared with a forecast 6.7554. The offshore yuan was little changed at 6.7764 as of 9:17am in Shanghai.

Opinion: Trump is staring down the barrel of yuan devaluation in US-China trade war

Trump’s criticism aside, China watchers have highlighted how the yuan’s depreciation this time around is better understood by investors as a reflection of economic fundamentals, rather than the 2015-style shock.

“A few years ago we didn’t have a story to justify the yuan weakening,” said Iris Pang, Greater China economist at ING Bank in Hong Kong. “It was the PBOC that triggered the sudden yuan devaluation, without any notice or without any hints,” she said of the People’s Bank of China in 2015.