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Macroscope
Opinion
David Brown
David Brown

Macroscope | Why yuan devaluation is not in China’s best interests and it’s time for Beijing to stop the free fall

  • David Brown says an adverse midterm election for Trump could see him push for a weaker dollar, resulting in a currency war that further rattles markets
  • A weaker yuan will intensify the Chinese economy’s focus on exports, in contrast to Beijing’s intention of concentrating on domestic consumption

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Financial markets have watched anxiously as the yuan has neared an exchange rate of 7 against the US dollar. Photo: Kyodo
David Brown
It is well past the time for Beijing to tame the weak yuan. Over the past two years, China’s currency has suffered a wild roller-coaster ride, a stomach-churning experience for exporters who need currency stability not wild foreign exchange volatility to plan ahead with confidence.

The weak yuan has also given the economy the wrong signals by back-tracking on Beijing’s commitment to shift the focus away from export-led growth to domestic consumption. There are far better ways to revitalise domestic growth than the blunt force of yuan devaluation.

The strong US dollar could prove a very fickle friend for China, especially if Washington starts playing its own game of currency manipulation to pressure Beijing in the trade war. A hostile US President Donald Trump could prove a dangerous risk, especially in a backlash to any possible US midterm election shocker this week. If his back is up against the wall, it might be hard to resist the temptation to plug for a weaker dollar to gain more economic advantage over China. An all-out currency war would be a regime shift that markets can ill afford right now.
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It is time for Beijing to take a moral lead and set a ceiling for the dollar/yuan exchange rate to go no higher than 7. Recent hints have suggested some stabilisation may be preferable now, so all Beijing needs to do is lean with the wind and give recent yuan appreciation some gentle endorsement to reinforce the move.

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After all, what policymakers want for their currency, they generally get – if they push hard enough. Beijing just needs to be more explicit on its aims. Betting against currency speculators is one thing, but Beijing needs a credible forex policy fix for the future.

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