The Chinese Yuan has declined against the dollar each day this week, and continues to hover around a 10 year low against the greenback.
The Chinese currency has declined by nearly 7% so far this year and its slide has drawn the attention of policy makers. People’s Bank of China Vice Governor Pan Gongsheng was recently quoted in an article by wsj.com, warning investors to stop betting on the currency’s slide. He stated: “For forces that try to short renminbi, we fought hand to hand a few years ago, and we are very familiar with each other. I think it’s still fresh in both of our memories.”
The Chinese currency is approaching the 7 per-dollar level, a level that has technical significance. A breach below this key threshold could send the currency even lower as individuals and businesses could look to expatriate capital ahead of any further weakness. The yuan has not traded below the threshold since 2008.
The U.S. Dollar has rallied not just against the yuan this year, but other key pairs as well. Rising inflation, economic strength and a degree of risk aversion have all played a role in the dollar’s upside.
Why the Yuan Is Under Such Pressure?
The yuan is under pressure due to numerous factors, including a slowdown in the Chinese economy and the ongoing trade war with Washington. The U.S. and China appear to be headed in opposite directions, as China sees weaker growth the U.S. economy continues to gain steam.
Although a weaker yuan may be good for Chinese exporters who sell their goods in dollars but pay their associated costs in yuan, any further weakness in the currency could exacerbate already high tensions between Washington and Beijing.
Any additional signs of an economic slowdown in China or increasing U.S. tariffs on Chinese goods could keep the yuan on its heels. The Chinese Government could step in and take even more direct action to halt the currency’s slide in the weeks and months ahead.
Yuan weakness and the corresponding economic slowdown in China appear to be fueling risk aversion in global markets. Recent Shanghai Composite index sell-offs have spilled over into other global equity markets, and demand for perceived safe havens such as gold has risen sharply.