Will PBOC abandon Yuan’s ‘Threshold 7’ soon?

There is a great paradox in the debate on the Chinese yuan. After stalling in negotiations between the United States and China to end the trade war, the exchange rate against the dollar has begun to weaken again, approaching that “threshold 7” that many Forex traders see as a psychological threshold.

The last time the yuan broke that barrier was during the 2008 crisis: since then the Chinese central bank has always intervened to stabilize the national currency, even at the cost of heavily depleting its foreign currency reserves.

The paradox lies in the fact that it is now the United States of President Trump that threatens Beijing to include China in countries that manipulate the exchange, asking the country not to depreciate the renmimbi, which is the same as manipulating it.

At the last G20 summit last week, US Treasury Secretary Steven Mnuchin said that the absence of an intervention on the exchange rate by the People Bank of China can be interpreted as manipulation if “the markets expect it and you did it for a long time”.

Clearly, it is in China’s interest to depreciate the yuan, since it would make its products cheaper on foreign markets, considerably limiting the effects of the tariff policy imposed by Donald Trump and restoring competitiveness to its businesses. The problem is that a depreciation would also cause capital flight to financial assets denominated in stronger currencies and undermine President Xi Jinping’s great project of making the renmimbi an international currency used in global trade, as an alternative to the dollar.

It is therefore possible that, if the trade war persists, Beijing decides to no longer respect the “threshold 7”, leaving the national currency depreciate with uncertain outcomes even for the USA.