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Coronavirus: China unlikely to defend falling yuan, despite US trade deal pressure, analysts say
- Coronavirus outbreak has sent the Chinese yuan below the psychologically important rate of 7 to the US dollar this week
- Same barrier led Donald Trump to brand China a ‘currency manipulator’ last year, but conditions different this time, analysts said
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China is unlikely to take forceful measures to defend a decline in the yuan’s exchange rate in response to the novel coronavirus, in the hope that that the US will refrain from labelling Beijing a currency manipulator, analysts said.
The US-China phase one trade deal, the terms of which are slated to take effect no later than February 14, included commitments by China not to engage in competitive currency devaluation. In return, the US Treasury removed the “currency manipulator” label it had imposed on China last August.
But analysts said that Beijing may now be tempted to allow the yuan’s exchange rate to gradually depreciate to support exports in the coming weeks. Extensive government efforts to contain the coronavirus are set to cause economic growth in China to slow abruptly.
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The Lunar New Year holiday was extended for most of the country, while factories and other workplaces were subsequently kept shut on government orders. Widespread travel restrictions have been imposed, transport services curtailed and tourist groups banned.
“Growth is going to be very challenging because every city and every province is in lockdown. There are a lot of shops that are staying closed,” said Jimmy Zhu, chief strategist at Fullerton Markets. “[The central bank] totally understands there is going to be downward pressure on the yuan. They don’t want to kill the manufacturing sector.”
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