The Chinese yuan’s weakness will be a focal point during the U.S.–China trade talks in late August, as both countries grapple with the fallout from recent fluctuations in the currency markets, analysts said.
The mid-level talks will likely be about “how exactly are they going to deal with the RMB (renminbi),” said Robin Brooks, chief economist at the Institute of International Finance, referring to another name for the yuan.
On Friday morning in Asia, the dollar traded around 6.89 against the Chinese yuan — a whisker away from 7, a level last witnessed in May 2008.
The dollar has gained about 6 percent against the yuan since the start of the year, with much of the appreciation occurring in the last two months.
The Chinese currency has been weakening against the greenback due to both escalating trade tensions as well as rising interest rates in the U.S. driving up the value of the the dollar.
China’s central bank sets a daily exchange rate for the yuan based on recent prices and allows trading against the dollar within a band of 2 percent above or below that level.
Recent weakness in the yuan has spurred some to say that China is allowing its currency to depreciate — either deliberately or in tandem with market forces — as the trade war with the U.S. hits its economy.
“China basically devalued in a retaliatory fashion to the tariffs that the U.S. imposed. I think that ended up being counterproductive,” said Brooks, who predicted both parties would try to find a way forward.
During his campaign for the White House, Donald Trump said he would name China a currency manipulator from his first day in office. But that rhetoric has been much more subdued during his presidency.
However, there are signs he is ratcheting up the heat again.
“In China, their currency is dropping like a rock and our currency is going up, and I have to tell you it puts us at a disadvantage,” Trump said last month.
But many currency experts say that a weak yuan would actually be bad for China as it imports most of its parts from the rest of Asia.
So, any manufacturing components priced in a non-yuan currency become more expensive in local terms, raising the cost of producing Chinese goods.
There’s also Chinese debt denominated in the dollar, which would become more burdensome when the yuan weakens.
Analysts also said the yuan is not undervalued in the current global environment — it’s simply weakened alongside softening economic data from the world’s second-largest economy.
