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Chinese President Xi Jinping chairs and addresses the leaders' roundtable during the second Belt and Road Forum in Beijing. Photos: Xinhua

Xi Jinping seeks to ease currency war fears as China and US near trade deal

  • Chinese president says country ‘will not engage in any beggar-thy-neighbour’ devaluation
  • Market will be allowed to play ‘decisive’ role in setting yuan exchange rate, while keeping it ‘basically stable’

President Xi Jinping on Friday said China would avoid any form of “beggar-thy-neighbour” currency devaluation, suggesting Beijing does not intend to use the currency as a trade weapon and pushing up the yuan in the foreign exchange market.

In his keynote speech at the Belt and Road Forum in Beijing on Friday, Xi said China would allow the market to play a “decisive” role in setting the yuan exchange rate while keeping the rate “basically stable”, in response to allegations the country has manipulated the value of its currency to seek advantages in trade.

“China will not engage in any beggar-thy-neighbour currency devaluation,” the president said.

The promise came as Beijing and Washington are entering the final stage of their trade deal negotiations, with the yuan exchange rate reportedly part of that pact.

But there are public concerns in China, and among some researchers, that Beijing is signing a currency deal similar to the Plaza Accord of 1985 – an agreement between the United States, Japan, West Germany, France and Britain that led to an asset bubble and lost decades for Japan’s economy.

Xi did not mention the US or the two countries’ protracted trade war in his speech.

He said China would work more closely with other major economies on policy coordination.

“A globalised world requires globalised governance,” Xi said. “China will strengthen macroeconomic policy coordination with other major economies to strive for positive policy spillovers and to promote strong, sustainable, balanced and inclusive growth in the world economy.”

China will strengthen macroeconomic policy coordination with other major economies to strive for positive policy spillovers and to promote strong, sustainable, balanced and inclusive growth in the world economy.

China’s “managed floating exchange rate” system allows Beijing to dictate the value of the yuan – also known as the renminbi – against other currencies, an arrangement that has drawn frequent complaints from Washington.

During his election campaign, US President Donald Trump threatened to label China as a “currency manipulator”, accusing Beijing of deliberately keeping the yuan’s value low to boost Chinese exports.

But he did not go ahead with that threat once he took office.

Meanwhile, the Chinese government has been trying to keep the yuan from weakening too much since the summer of 2015, when the country’s surprising 1.9 per cent devaluation of the yuan in August, on top of a stock market rout, triggered an exodus of capital from the country.

Draconian controls have been imposed on capital outflows and heavy-handed intervention – including the central bank tweaking the mechanism that sets the yuan price every day to give Beijing more say in its value – has kept the yuan stronger than the key level of 7 to the US dollar.

On Friday, the onshore yuan exchange rate strengthened 0.2 per cent to 6.73 to the dollar, rebounding from a two-month low on Thursday. The offshore rate jumped by 0.3 per cent – a big move for the currency – to a similar level immediately after Xi’s speech.

Ding Shuang, chief China economist at Standard Chartered Bank in Hong Kong, said Xi’s promise that there would be no competitive devaluation did not mean the yuan would only strengthen against the US dollar.

Ding said there would be further swings in the yuan exchange rate after Beijing and Washington reached a trade deal as China reduced intervention in the exchange rate market.

“If China’s balance of payments or current account deteriorates because of market forces, there’s still a possibility for the yuan to weaken,” Ding said.

Larry Hu, chief China economist at Macquarie Capital in Hong Kong, said China’s rejection of a currency war was part of Beijing’s compromise to reach a trade deal with the US.

“Both sides have made some concessions to end the trade war,” Hu said.

This article appeared in the South China Morning Post print edition as: president seeks to ease fears of currency war
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