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China is letting its currency decline in a 'snub' to Trump, ING says

Key Points
  • In a report on Monday, ING said the yuan has been moving much more narrowly in the past two months as China's central bank, the People's Bank of China, has emphasized "stability" in currency policy.
  • "We believe the change in direction, albeit small in substance, is a way for China to show that its yuan policy is independent from the influence of other countries," Iris Pang, ING's economist for Greater China, said in the report.
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China has started letting the yuan weaken slightly in a pointed "snub" to U.S. President Donald Trump, Dutch bank ING said in a report.

Different U.S. administrations have long claimed China derives unfair export price advantages by keeping the yuan artificially weak, a charge Beijing denies. Still, the United States has refrained from officially labeling China a "currency manipulator."

Though Chinese authorities have loosened controls over the years, the yuan is still tightly managed and allowed to trade within a narrow band of 2 percent either side of a daily fixed point.

ING said the yuan has been moving much more narrowly in the past two months as the People's Bank of China, the central bank, has emphasized "stability" in currency policy.

But the Chinese currency, also known as the renminbi, weakened against the dollar by 0.2 percent in March, and by 0.3 percent so far in April, ING said on Monday in the report. That compares with the yuan strengthening by 2.45 percent in first two months of the year, it added.

We think a substantial yuan depreciation would only be possible if China wants to pick a fight with the U.S., at the cost of increasing market concern about capital flight from the country and this seems highly unlikely.
Iris Pang
ING's economist for Greater China

The yuan was trading at about 6.7405 against the U.S. dollar on Tuesday afternoon in Asia, weakening further after disappointing manufacturing data dampened confidence on its economic recovery.

"We believe the change in direction, albeit small in substance, is a way for China to show that its yuan policy is independent from the influence of other countries," Iris Pang, ING's economist for Greater China, said in the report.

"We think this is a snub to the Trump administration who said that the yuan cannot depreciate if there is a U.S.-China trade deal."

'Pick a fight'

The U.S. has reportedly asked China to address the yuan's value as part of ongoing talks to forge an agreement to end the countries' year-long trade war.

The two sides are meeting this week in Beijing in their latest attempt to make progress in reaching an agreement. Optimism has increased this year, with some experts believing a deal could be announced within a few weeks, and others see it taking place within months.

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What is currency manipulation?

ING's Pang said that regardless of the timing of a deal, the yuan's recent tight range is unlikely to change for the rest of this year due to the "political environment" after an agreement is concluded.

"We're ruling out a sharp yuan appreciation because we believe that will be interpreted as appeasing the U.S.," she said, adding that would be politically unacceptable for Beijing.

"And we think a substantial yuan depreciation would only be possible if China wants to pick a fight with the U.S., at the cost of increasing market concern about capital flight from the country and this seems highly unlikely," she said.

ING is predicting that the the dollar could trade at 6.75 yuan in the fourth quarter of this year, which would mark an overall appreciation of 2.62 percent for the full year.