China lets yuan drop to five-month low on US tensions, uncertain global economic outlook

Against the RMB index, which is made up of a weighted basket of currencies from China’s major trading partners, the yuan has declined for 16 straight trading sessions

The Chinese currency has stabilised against the US dollar in May, but could fall again if Washington takes action over the Hong Kong national security law

3-MIN READ3-MIN

China has let the value of the yuan slip against the RMB index as tensions with the US grow and the economic outlook remains murky. Photo: AP

Published: 11:05am, 9 Jun 2020Updated: 8:12pm, 9 Jun 2020

China is tolerating a gradual weakening of the yuan’s value against a basket of major currencies because of a worsening political confrontation with the United States and a challenging economic outlook, analysts said.

Beijing could also allow the yuan to weaken against the US dollar if the Trump administration imposes severe sanctions on China for moving ahead with a new security law in Hong Kong.

The yuan fell to 7.1778 against the US dollar at the end of May, near the rate it was trading at in September, which was the weakest level in 11 years, before subsequently rebounding. As of Tuesday, it had strengthened to trade at 7.0750 against the US dollar.

But against the RMB index, which is made up of a weighted basket of currencies from China’s major trading partners, the yuan has declined for 16 straight trading sessions to 91.69, its lowest level in five months, down from this year’s peak of 95.7.

The decline in the currency suggests that the People’s Bank of China (PBOC) is tolerating a weaker yuan against its trade-weighted basket to support its exporters and economy as economic friction with the US escalates, analysts said.

A weaker yuan against a particular currency makes Chinese exports more affordable for foreign buyers in that country, which helps support growth at home.

In addition, downward pressure on the yuan could arise from a potential US decision to revoke Hong Kong’s status as a separate customs and travel territory from the rest of China, dampening foreign investment and re-export trade to the city.

“In the short term, it may lead to yuan depreciation pressure from the perspective of risk appetite and capital flows,” Huatai Securities said.