Macroscope | Will the yuan weaken further or bounce back next year? First, work out how strong the US dollar and euro are

Neal Kimberley says the yuan might not weaken, despite China’s slowing economy and the trade war. Foreign exchange is relative. For the yuan to weaken, the market would also be making a judgment about the appeal of other currencies

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Foreign exchange is relative. If the yuan weakens against the dollar, the market is making a judgment on the appeal of both currencies. Photo: Kyodo File photo taken July 5, 2018, shows U.S. dollar and Chinese yuan banknotes. (Kyodo) ==Kyodo

Published: 12:00pm, 18 Dec 2018Updated: 10:23pm, 18 Dec 2018

The pace of Chinese economic growth is slowing and a 90-day timeout from the trade war with the United States doesn’t guarantee a peace treaty will be reached. Against such a backdrop, a case can certainly be made that the yuan, which has been on the back foot for much of 2018, will remain weak in 2019. Or could the renminbi regain its poise?

There are a number of issues to consider, not least that foreign exchange is a market of relative values. For example, if the yuan weakens versus the US dollar or the euro, the market is making as much of a judgment about the attractiveness of those other currencies as about the softness of the renminbi.

Those who see continued yuan weakness can point to the facts that the Chinese economy is slowing and the China-US trade war won’t easily be resolved.

“The economic cycle is downward, so we need relatively loose monetary conditions,” People’s Bank of China governor Yi Gang said on December 13, though he emphasised that while the Chinese central bank will be flexible in setting monetary policy, it has the resources to keep the yuan stable.

Recent data would support Yi’s view. Retail sales in China may have risen 8.1 per cent in November, year-on-year, but that figure, released last Friday by the National Bureau of Statistics, was below expectations for an 8.8 per cent increase, and was the smallest rise in 15 years. As for the 5.4 per cent year-on-year rise in industrial production in China in November, that was the slowest pace for almost three years.

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.css-1m2rp1p{color:#34b8b5;}Macroscope | Will the yuan weaken further or bounce back next year? First, work out how strong the US dollar and euro are

Macroscope | Will the yuan weaken further or bounce back next year? First, work out how strong the US dollar and euro are