Macroscope | The real reasons the yuan fell had little to do with Chinese manipulation

The recent sharp depreciation of the renminbi has ignited fears that Beijing is resorting to currency devaluation to fend off an escalating trade war with the United States. The yuan’s value vis-à-vis the dollar has fallen by more than 6 per cent since the middle of June. The CFETS RMB index has also depreciated by more than 5 per cent, suggesting that the yuan weakness was broad-based against peers in its trade-weighted basket.

Is Beijing competitively devaluing the currency to save its economy? Where will the exchange rate go from here? And how will the depreciation affect China’s economy?

On the first question, one has to realise that the yuan has only depreciated noticeably over the past six weeks. Before that, the exchange rate had been tracking the broad dollar move very closely up until mid-April and was resilient in light of the dollar rebound between mid-April and mid-June. Since the US Dollar Index has rallied by about 5½ per cent since mid-April, one could argue that the yuan was merely catching up to the dollar strength.

In addition, foreign capital flowed to the Chinese market following the inclusion of yuan bonds in the Bloomberg Barclays Global Aggregate Index and ahead of A-shares’ MSCI inclusion. For a brief period, China was seen as a “safe-haven” when concerns over rising US dollar and interest rates swept across the emerging markets.