China is considering devaluing the yuan (renminbi) to retaliate against the unwise and unnecessary import tariffs to be implemented July 6 by the United States at the behest of president Donald Trump.
China's devaluation of the yuan last hit global markets and sent stocks reeling in 2015 and 2016. In August 2015, the People's Bank of China (PBOC) devalued the yuan twice on successive days by lowering its daily mid-point trading price to 1.87% and 1.62% against the U.S. dollar and sending U.S. stocks down 6.3 percent. In the past five years, the two biggest monthly drops in the Standard & Poor's 500 Index of U.S. stocks were triggered by fears of a yuan devaluation.
The signs this time are ominous. Last week, or on June 22, the yuan extended its losses for a seventh straight session forcing the PBOC to lower the midpoint for a third straight day. PBOC set the midpoint lower by 98 basis points, or 0.15%, at 6.4804 yuan per U.S. dollar.
Over the next week, however, China is expected to allow a sharp drop in the value of the yuan as a way of retaliating against Trump's tariffs and boosting its exports. A devaluation will allow China to offset the effect of any U.S. tariffs on its exports by helping keep exports affordable for consumers.
"China could deliberately engineer a much larger depreciation of the yuan if its policymakers wanted to offset the damage from tariffs to export competitiveness," said economists at U.S.-based financial services company, PNC Financial Services Group, Inc. "While unlikely, the tail risk of a Chinese devaluation would be very bad news to the global economy if realized."
Over the past week, PBOC cut reserve requirements for banks to push more money into the economy without slashing interest rates. This move, however, weakened the yuan further. The yuan also fell three percent in the past month as the dollar strengthened against most world currencies.
Swedish banking group SEB on Monday predicted the yuan might weaken to 6.6 per dollar by the end of 2018, compared to a previous estimate of 6.2. The yuan traded at 6.58 to the dollar on June 26.
