Now We Think We Know What Happened to China’s Currency
DECEMBER 5, 2016 / Foreign Policy
Monday night, a sharp drop in the value of the Chinese renminbi sparked speculation about a deliberate policy move by Beijing. Overnight, media outlets including Bloomberg and the Financial Times reported that a technical glitch, perhaps caused by faulty third-party data, made the yuan seem like it was losing value even when it wasn’t. Below is Monday’s original story, including speculation about technical woes as well as broader concern in the foreign-exchange market about possible tensions between China and the United States.
On Monday, the Chinese renminbi fell by about 10 percent against the dollar in a matter of hours, one of the biggest one-day moves since Beijing allowed its money to partially float. The yuan dropped from about 6.8 to the dollar to about 7.5 — pushing China’s currency to the cheapest level since the 2008-09 financial crisis.
The sudden drop in the currency, also known as the yuan, is telling — if only because Beijing carefully controls its currency fluctuations. Daily movements are sharply limited, and leadership intervenes to prop up the currency — or let it slide — as political whims dictate. This year, the yuan has already gotten about 5 percent cheaper against the dollar, which makes Chinese goods more competitive against U.S. exports, and makes Chinese exports cheaper and more enticing for American consumers.
Monday evening, there was still plenty of confusion over the nature of the yuan’s plunge. Some ascribed it to a technical error on currency trading platforms; others confirmed that the movement, while brusque, was genuine — but they had little idea what drove the trading.
Could Beijing have have just answered President-elect Donald Trump’s weekend provocations?
On Sunday evening, as he had before on the campaign trail, Trump took aim at China’s currency policy, tweeting, “Did China ask us if it was OK to devalue their currency (making it hard for our companies to compete)”? Paired with anothertweet railing against China’s militarization of reefs and atolls in the South China Sea, Trump appeared to link the economic and security aspects of the U.S. relationship with China in a way seldom done before in Washington.
The question is whether Beijing, by allowing its currency to suddenly slide, thus giving its export-based economy an immediate boost, gave Trump an immediate and provocative answer to his tweets — or whether global currency traders, seeing signs of increased tension between China and the United States simply got bearish on Chinese money. Read more..