US and China should reach deal to arrest yuan slide

Chinese currency traders call it po qi or “breach seven”. That is the exchange-rate level of the depreciating yuan to the US dollar, the breaking of which is likely to signify a new and worsening phase in the trade war between China and the United States.

It will not only have enormous impact domestically in China, but also for the world economy, which is already softening.

At the moment, the yuan hovers around 6.9 to the US dollar. Most experts do not expect it to break the psychological and strategic 7 yuan level, at least not until after the Group of 20 summit opens in Osaka, Japan, on Friday.

A meeting between President Xi Jinping and his US counterpart, Donald Trump, has finally been set, and it will probably be the last chance the two sides have to thrash out an agreement before Washington carries out a threat to extend the 25 per cent levy on Chinese imports to the US to virtually all goods

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As a message of good faith ahead of the summit, Beijing has announced the issuance by the People’s Bank of China of 20 billion yuan (HK$22.7 billion) of one-month bonds and 10 billion yuan of six-month bonds in Hong Kong.

This should have a strengthening effect on the yuan. A deal is likely to reverse the yuan’s year-long slide. Going in the opposite direction will not be a good omen.

The central bank allows the onshore value of the yuan to move within a trading band of 2 per cent on either side of a midpoint it fixes each day.

China offers currency war truce ahead of Xi’s meeting with Trump

Amid the trade war over the past year, though, the currency has devalued about 8 per cent, which economists say has significantly offset the tariffs of 25 per cent on US$250 billion of goods already imposed by Washington.

Chinese policymakers have already signalled to markets that the 7 yuan breach is not impossible. Yi Gang, the central bank governor, said earlier this month that no preset limit existed for a US dollar exchange rate threshold. His predecessor Zhou Xiaochuan has also dismissed the importance of the 7 yuan level.

The statements of both men have been widely interpreted as China’s willingness to tolerate an even weaker yuan if Americans step up hostility.

The yuan’s slide has already prompted US Treasury Secretary Steven Mnuchin to recently accuse China of manipulation. He said whether a further slide in the Chinese currency was the result of active intervention or a passive stand-off, the US would take a dim view of any such movement.

Although Washington has again declined to label China “a currency manipulator”, Mnuchin’s remarks were clearly a warning ahead of the Osaka summit.

But the Americans can hardly expect China to stand still while they are firing shots. The best course of action is for both sides to get on with a deal.