China is trying to weaken its currency without freaking markets

By Jill Disis, CNN Business

Hong Kong (CNN Business)All eyes have been on China this week after it allowed a surprise devaluation of its currency on Monday, sending global markets into a tailspin.

It has continued to guide the yuan lower since then, triggering memories of the last time the country caused a market freakout by weakening the currency, also known as the renminbi. But make no mistake: This isn’t 2015.

The People’s Bank of China on Thursday set the yuan’s reference rate, which limits the range in which the currency can trade, above the 7-to-1 ratio with the US dollar for the first time since the Great Recession. Beijing had already allowed the yuan to trade around that level earlier in the week.

Stock markets in China broke a 6-day losing streak and the yuan actually traded a little higher than the previous day.
Before this week, 7 yuan to the dollar was a psychological threshold that many didn’t think China would allow the currency to cross just yet.

But since last week’s dramatic escalation in the US-China trade war, when the Trump administration announced plans to tax every Chinese export, Beijing has had less incentive to prop up its currency in the face of mounting pressure on the economy.
And outside of the Trump administration’s decision to label China a “currency manipulator,” there hasn’t yet been any meaningful backlash.
In fact, Thursday’s yuan rate fix shows that the country is comfortable with its “new normal,” said Ken Cheung Kin Tai, chief foreign exchange strategist for Asia at Mizuho Bank in Hong Kong.

The Chinese central bank had for the most part managed to achieve a “soft landing” for the yuan, he wrote in a research note.
Soft landing
The slow, steady guidance from Beijing is quite a shift from what happened four years ago, when the yuan plunged after the People’s Bank of China slashed its daily rate. Investors were spooked, and almost $680 billion flooded out of the country in 2015, according to the Institute of International Finance.

“Regulators weren’t at all prepared to respond to the surge in outflow pressures” at that time, wrote economists from Capital Economics in a research note Thursday. “Since then, they have put in place a much stronger infrastructure to monitor and control capital flows.”
What the yuan’s latest move does show, however, is just how bad the relationship with the United States has become.

While a weaker yuan does make Chinese goods cheaper for foreign buyers, most experts say China has been trying to boost its currency in recent years, contrary to the Trump administration’s claims.
Monday’s move may have been a warning shot across America’s bow. But China shows no sign of engaging in a full-blown currency war, wrote analysts with Pictet Wealth Management in a research note Thursday.

Handle with care
Still, they added that President Donald Trump’s decision to slap tariffs on China last week “likely eliminated any remaining incentives for the Chinese government to show more goodwill.”
“Trump’s habitual flip-flopping in his handling of the trade negotiations seems to have worn out the patience of Chinese leaders,” the analysts wrote.

China does have to be careful about how it manages this devaluation, though.
The Pictet analysts pointed out that the country’s non-government foreign debt makes up roughly 13% of GDP. If the yuan weakens too sharply, that could put stress on the companies that have borrowed overseas by making it harder for them to repay, they added.

Beijing, for its part, has maintained that it is being cautious about how it handles its currency. Earlier this week, the People’s Bank of China said it is committed to keeping the yuan’s exchange rate at a “reasonable and balanced level.”