Yahoo Finance 
'China doesn't need to punish itself for others' foolish trade policies': Wall Street warns Beijing against weakening its currency
AP/Emily Wang
The Chinese yuan has been sinking to fresh lows versus the dollar.
Though the People's Bank of China has tolerated the depreciation beyond its stated exchange-rate policy, analysts say yuan depreciation as a tool in a trade war would be too costly.
Amid China's currency sell-off and trade battle with the US, some analysts are drawing comparisons to 2015, when the country's central bank allowed the yuan to drop nearly 5%.
The yuan on Tuesday hit its lowest level versus the dollar in nearly a year. The currency has plummeted 6% versus the dollar since March, when the Trump administration announced plans to penalize China for what officials found to be unfair trade practices.
"There have been some fluctuations in the foreign-exchange market recently," Yi Gang, the People's Bank of China governor, said in a statement. "We are paying close attention to this. This is mainly due to factors such as the strength of the US dollar and external uncertainty, and some procyclical behaviors."
Chinese officials have said they will not use yuan depreciation as part of a trade battle with the US, but the slide has still raised questions about whether the country's central bank could use the yuan to boost exports.
While some of the depreciation has been a result of a greenback rally, Citigroup's top China economist, Li-Gang Liu, said there was also evidence officials had "tolerated the depreciation beyond its own stated exchange rate policy."
The People's Bank of China last week cut its reserve requirement ratio, or the amount of money commercial banks have to store, for some institutions by 50 basis points. The move is expected to release more than $100 billion in liquidity.
The Deutsche Bank strategist Perry Kojodjojo said he did not think China would "weaponize" its currency as part of retaliation against the US, given the potential costs. For one, a depreciation similar to that of 2015 could hurt equities and risk capital flight.
Kojodjojo noted that in an environment in which China is already seeing its account surplus thin, this could tip its balance of payments into a "notable" deficit.
"This would likely dent China's hopes of further internationalizing the [yuan] — and should in itself be a deterrent to using [the yuan] as a policy option in the trade wars," Kojodjojo said.
Liu said a depreciated yuan could also give life to industries China has been trying to reduce overcapacity in, often those that are labor-intensive and highly polluting. This could reduce incentive to move up the value chain, he said, stalling Beijing's Made in China 2025 plan.
"China doesn't need to punish itself for others' foolish trade policies," Li-Gang said, agreeing that a significant devaluation would be "too costly" for China in both the short run and the long run.
Macquarie's Larry Hu and Irene Wu wrote in a recent research note that the People's Bank of China may have chosen not to intervene as part of a deleveraging campaign.
"Some are more pessimistic than us as they view the recent depreciation from the angle of trade war or stimulus," they wrote, adding that they see those claims as a "myth."
NOW WATCH: Trump pitched peace to Kim Jong Un with this Hollywood-style video starring Kim as the leading man
See Also:
