China Says Won’t Devalue Currency, But Market Will Anyway

CHINA-CURRENCY-US

The government said it won't force the yuan lower. Who believes them?

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China's government pledged not to devalue the yuan to make up for extra tariffs coming next month, but that doesn't matter. The market will devalue it anyway. The People's Bank of China probably won't stop it.

"I think there is going to be this 'staircase movement' in the yuan, letting it fall 3% to 5% within the next two months and then keep it stable for about six months before making the next depreciation move," says TS Lombard's chief China economist Bo Zhuang. "They do this in order to stabilize market expectations. People in China know what's coming. I would say that if China doesn’t get a deal with the U.S., you will see this kind of movement in the currency: weak, long stability, then weak again," he says, forecasting the yuan to hit 7.5 to the dollar within the next 18 months. The yuan is currently trading at 7.04 to the dollar.

China will stick to its “managed floating exchange rate system” and keep the Chinese currency’s exchange rate “basically stable,” Pan Gongsheng, a vice-governor with the People’s Bank of China and the head of China’s State Administration of Foreign Exchange, wrote in an article published on Monday.

The South China Morning Post translated Pan's words yesterday: "China is a big responsible country. We adopted a responsible approach during the Asian financial crisis (in 1998) and the global financial crisis (in 2008),” Pan reportedly wrote. “We will not engage in a competitive devaluation and won’t use the exchange rate as a tool to handle international trade disputes."

China does have a managed exchange rate system. It does not allow its currency to crash, like the Argentine peso did on Monday. But market forces can push it lower, and that forces the central bank to reset the trading band.

The central bank did so last week, setting it at 6.9 to the dollar, and allowing for the usual trading band of roughly 4% in either direction. When the central bank made that move weaker, the U.S. Treasury Department swiftly labeled them a currency manipulator for the first time in over 20 years.

Meanwhile, on the trade war front, President Trump surprised the market yet again on Tuesday, saying that some tariffs set to hit on September 1 will only hit in December. Assuming that is the case, then by year's end every China export to the U.S. would be charged higher port duties.

Monday August 19 marks the end of Huawei's temporary license to buy U.S. microprocessors and semiconductors. It is unclear whether those licenses will be permitted after that date unless China agrees to purchase U.S. farm goods. This could be a moment of truth in the trade war. China investors will be watching this one closely.

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China's government pledged not to devalue the yuan to make up for extra tariffs coming next month, but that doesn't matter. The market will devalue it anyway. The People's Bank of China probably won't stop it.

"I think there is going to be this 'staircase movement' in the yuan, letting it fall 3% to 5% within the next two months and then keep it stable for about six months before making the next depreciation move," says TS Lombard's chief China economist Bo Zhuang. "They do this in order to stabilize market expectations. People in China know what's coming. I would say that if China doesn’t get a deal with the U.S., you will see this kind of movement in the currency: weak, long stability, then weak again," he says, forecasting the yuan to hit 7.5 to the dollar within the next 18 months. The yuan is currently trading at 7.04 to the dollar.

China will stick to its “managed floating exchange rate system” and keep the Chinese currency’s exchange rate “basically stable,” Pan Gongsheng, a vice-governor with the People’s Bank of China and the head of China’s State Administration of Foreign Exchange, wrote in an article published on Monday.

The South China Morning Post translated Pan's words yesterday: "China is a big responsible country. We adopted a responsible approach during the Asian financial crisis (in 1998) and the global financial crisis (in 2008),” Pan reportedly wrote. “We will not engage in a competitive devaluation and won’t use the exchange rate as a tool to handle international trade disputes."

China does have a managed exchange rate system. It does not allow its currency to crash, like the Argentine peso did on Monday. But market forces can push it lower, and that forces the central bank to reset the trading band.

The central bank did so last week, setting it at 6.9 to the dollar, and allowing for the usual trading band of roughly 4% in either direction. When the central bank made that move weaker, the U.S. Treasury Department swiftly labeled them a currency manipulator for the first time in over 20 years.

Meanwhile, on the trade war front, President Trump surprised the market yet again on Tuesday, saying that some tariffs set to hit on September 1 will only hit in December. Assuming that is the case, then by year's end every China export to the U.S. would be charged higher port duties.

Monday August 19 marks the end of Huawei's temporary license to buy U.S. microprocessors and semiconductors. It is unclear whether those licenses will be permitted after that date unless China agrees to purchase U.S. farm goods. This could be a moment of truth in the trade war. China investors will be watching this one closely.

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I've spent 20 years as a reporter for the best in the business, including as a Brazil-based staffer for WSJ. Since 2011, I focus on business and investing in the big eme...