When Donald Trump began lashing out at Beijing over its handling of the coronavirus pandemic, global currency traders’ attention snapped back to the exchange rate that last year nearly brought the world’s two most powerful economies to an impasse.
The renminbi has fallen by 0.5 per cent against the dollar since the end of April, when the US president asserted, without providing evidence, that he was “confident” Covid-19 emerged from a laboratory in Wuhan. He suggested that imposing trade tariffs could be one way to punish China in response.
That would pile more pressure on the Chinese currency, investors say, stalling trade talks between the two superpowers and threatening the stability of other emerging markets whose currencies would be forced lower by a weaker renminbi.
“If there’s any further escalation, the [renminbi] will inevitably weaken more,” said Esther Law, senior emerging-markets debt portfolio manager at Amundi.
Ms Law said the renminbi could drop to as low as Rmb7.30 against the dollar in the coming months — a level that would represent the Chinese currency’s weakest point since the beginning of 2008. The currency has fallen almost 2 per cent since the start of the year to around Rmb7.09.
The renminbi-dollar exchange rate occupied centre stage in currency markets for much of 2019 as tensions between Beijing and Washington simmered. When relations reached a nadir last summer, China signalled its determination by allowing the renminbi to slip past seven to the dollar, prompting the Trump administration to label it a currency manipulator.
The Chinese currency steadied on Friday after US officials said the so-called phase one trade deal between the two countries remained on track. But analysts believe that Mr Trump could be tempted to apply new punitive tariffs to Chinese goods ahead of November’s presidential election, as the president seeks to pin the blame for the explosion of coronavirus cases in the US and around the globe on Beijing.
“The renminbi is a casualty of the more aggressive tone the White House is taking . . . and it seems likely that the US will be taking a more hawkish position ahead of the US presidential election,” said Mark Williams, chief Asia economist at research firm Capital Economics. He forecasts a gradual depreciation over the coming months.
A more drastic drop, past Rmb7.50 to the dollar, could cause a sell-off in emerging market currencies and stocks globally, Mr Williams said, deepening the crisis in economies that are already suffering as a result of coronavirus.
More aggressive manoeuvring from Washington could encourage retaliation from Beijing. Both sides have pledged to avoid competitive currency devaluation but that agreement depends on the US not imposing further tariffs on China.
China’s ruling party maintains tight control over its exchange rate. Should Mr Trump impose greater restrictions on trade, it would further weaken the renminbi but also increase the competitiveness of the country’s exports.
It would be unrealistic to expect China to prop up its currency if the devaluation was clearly the result of a US policy decision, said Brad Setser, senior adviser at the Washington-based Council on Foreign Relations.
“It raises the question of whether China’s strategy out of the coronavirus crisis is to export itself out,” said Mr Setser. “That would be negative for the global economy . . . in a context where global demand is shrinking and likely to remain very weak for the next several quarters.”
Some traders appear to be positioning themselves for another move lower in China’s currency. Sameer Goel, chief Asia macro strategist at Deutsche Bank, said bets that the renminbi would lose ground against the dollar had increased slightly in recent days as tensions escalated but added the market as a whole had not shifted to brace for the imminent imposition of tariffs.
Part of that is down to moves by the People’s Bank of China. China’s currency has two exchange rates over which the central bank can exert varying degrees of influence. For the more important and tightly regulated onshore rate, the PBoC sets a daily midpoint around which the currency can move 2 per cent in either direction.
Mr Goel said the PBoC had so far refrained from managing the trading band in a way that suggested it was trying to massage the value of the renminbi lower. That had “assured the markets there is no policy effort towards weaponising the currency”.
Michelle Lam, Greater China economist at Société Générale, said a weaker renminbi was unlikely to provide much of a boost to demand for Chinese goods given the poor health of the global economy. “I don’t think it will be helpful for exports,” she said.
In the end, the renminbi “sits wherever the People’s Bank wants it to sit”, said Capital Economics’ Mr Williams.
“They will allow some weakness but not a sharp move lower. If it deteriorated significantly it might seem like an unfriendly step by a lot of countries and right now China could do with some friends.”
