U.S.-China Trade Worries Drag Down Yuan
December 06 2018 - 7:24PM
Dow Jones News
By Ira Iosebashvili and Julie Wernau
The yuan is falling again as investors grapple with fresh
prospects of deteriorating trade relations between the U.S. and
China.
China's currency has pared much of the gains it garnered in a
two-day rally sparked by signs of progress in trade talks at last
weekend's summit of Group of 20 leaders in Buenos Aires. The arrest
this week of a top Chinese tech executive has some investors
concerned that a trade truce between the U.S. and China could be
more complicated to maintain than anticipated.
The yuan is down 5.5% against the dollar this year, on track for
its biggest loss against the U.S. currency since 2016. One dollar
recently purchased 6.88 offshore yuan, compared with around 6.30
this summer.
More weakness in the yuan could further complicate trade talks
between the U.S. and China, analysts said, as a lower yuan makes
Chinese exports more competitive abroad. President Trump has
complained that China and Europe are intentionally weakening their
currencies to disadvantage the U.S., and the U.S. Treasury voiced
concern in October about Beijing's currency practices, though it
stopped short of labeling China a "currency manipulator."
One factor behind recent swings in U.S. stocks and bonds are
fears that an intensifying trade conflict could weigh on global
growth. Although China's central bank partly controls the yuan's
fluctuations, some investors would view further weakness in the
currency as an indication that trade tensions are hurting the
Chinese economy.
The S&P 500 has lost 2.3% this month, while the yield on the
U.S. 10-year Treasury has fallen below 3%.
A situation in which growth contracts in the U.S. while also
falling in China and Europe would likely add further volatility to
already turbulent global markets, said Adnan Akant, head of
currencies at BNP Paribas Asset Management.
"That scenario probably has the dollar strengthening, the yuan
blowing through 7...and emerging markets going back down the
drain," he said.
The narrowing gap in yields offered by U.S. and Chinese assets
has contributed to the yuan's fall. While the U.S. has been raising
interest rates and will likely continue raising borrowing costs
into next year, China has tried to support growth by pursuing a
looser monetary policy. Rising yields on U.S. debt dim the allure
of Chinese assets, where high yields often come with more risk.
If that trend continues, short-term yields for dollar bonds will
surpass yields of a similar maturity for yuan debt in 2019 for the
first time in about a decade, analysts at UBS Global Wealth
Management said.
A falling yuan would also worry investors betting that other
emerging market currencies will rebound next year. The MSCI
Emerging Markets Currencies Index is down 3.4% this year. The
world's second largest economy, China is a key consumer for many
emerging-market exports, especially commodities. Some
developed-market currencies, such as the Australian and New Zealand
dollars, are also particularly sensitive to the yuan's
fluctuations. China is an important market for Australian
commodities, such as iron ore, and for New Zealand's dairy
products.
"If you get a significantly weaker yuan, how can there be a big
rally in emerging markets, which are so impacted by the Chinese
economy?" said Kit Juckes, a strategist at Société Générale.
Worries about stoking the trade conflict with the U.S. could
force China to prevent its currency from falling too rapidly,
analysts said. So will concerns over capital flight from China,
which a weaker currency would exacerbate.
Positive developments in trade negotiations could also slow or
reverse the yuan's decline. The dollar could rise to 7.5 yuan next
year if the U.S. implements more tariffs on Chinese imports, while
a trade deal and reduced tariffs could push the yuan to 6.5, a
report from UBS Global Wealth Management said.
Still, some are concerned that a weaker yuan could spook
investors into lightening up on Chinese assets and drive markets
lower, as they did during sharp selloffs in 2015.
"Any depreciation with a communication or signal to the market
of further depreciation can lead to local investors front running
that move, more weakness and more capital flight," said Phil
Torres, global co-head of emerging markets debt at Aegon Asset
Management.
Write to Ira Iosebashvili at ira.iosebashvili@wsj.com and Julie
Wernau at Julie.Wernau@wsj.com
(END) Dow Jones Newswires
December 06, 2018 19:09 ET (00:09 GMT)
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