Yuan Drops to 4-Year Low and China Announces Possible Stimulus

Alan Penny

27 August 2019

3 min read

China forex news

  • Yuan experiences biggest loss in 25 years
  • Beijing considers measures to mitigate the issues caused by U.S. – China trade war

Biggest loss recorded

Since the beginning of August, the Yuan has dropped by 3.9%, making it the most significant loss since 1994, when the country adopted the current exchange rate regime.

The decline was sparked by increasing tensions between the United States and China in trade negotiations. Further indications that the economy is slowing down along with strong expectations that additional easing will take place have also added pressure to the yuan.

Dariusz Kowalczyk of Credit Agricole stated that the situation will continue to deteriorate for China and the world if there is no clear sign of progress in the negotiations. According to Kowalczyk, the yuan could weaken to as much as 7.3 to the U.S. dollar.

Tuesday saw the People’s Bank of China set the yuan’s daily reference rate at a level that’s higher than expected for the fifth day in a row. If the yuan doesn’t strengthen, it could result in capital outflow and further weakness, which could lead to instability.

Yuan drops to a new 11-year low against the USD

Friday saw the Chinese government and President Donald Trump volley threats of more tariffs at each other. This led to the yuan dropping to a new 11-year low at the beginning of the week.

According to strategists from the Bank of America Merrill Lynch, the People’s Bank of China might allow the currency to weaken further to counteract the tariffs. It is believed the yuan could be allowed to drop to 7.5 by the end of 2019.

Tuesday saw the yuan trading at 7.1621 to the U.S. dollar, equating to a decline of 0.14%.

CFETS RMB Index hits a new 4-year low

The yuan hasn’t just weakened against the U.S. dollar, though. The CFETS RMB Index, which measures the yuan against 24 currencies from China’s main trading partners, dropped to 91.1. This is the lowest the index has been at since 2015 when it was first introduced.

Beijing indicates possible economic stimulus measures

China is feeling the effects of the trade tensions, considering their recent announcement. Beijing’s State Council stated it might implement a series of measures to boost the economy and mitigate the damage caused by the U.S. – China trade war.

One such measure is to lift restrictions on car sales that some local governments have implemented. The goal is to increase demands for new vehicles, especially considering that sales have fallen in this sector over the last year.

Other measures include renovating commercial pedestrian streets, providing more help to stadiums and shopping malls, and converting old factories into commercial complexes. They are also considering allowing restaurants and shops to stay open longer, as well as providing more help to consumers to purchase smart home appliances and electric cars on credit.

The goal is to boost growth, which declined to 6.2% per year in Q2 of 2019. However, experts feel more stimulus will be required if the situation between the U.S. and China does not improve.

Written By
Alan Penny

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