Beijing Lets Yuan Weaken by Most in 18 Months

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China guided the yuan to its largest one-day drop against the U.S. dollar in a year and a half, with an intensifying trade conflict between the world’s two largest economies putting fresh pressure on the Chinese currency.

The People’s Bank of China on Thursday set the dollar’s reference rate at 6.6726 yuan, weakening the yuan by 0.7% compared with Wednesday. The central bank determines a daily dollar-yuan exchange rate, known as the fix, and allows the currency pair to trade as much as 2% above or below that level. Still, the yuan didn’t weaken by as much in the fix as many analysts had expected.

The yuan’s decline in the fix echoed market trading the previous day, when the yuan fell 0.7% to 6.6674 per dollar. The swoon came after the U.S. unveiled further proposed tariffs, this time worth 10% on $200 billion in Chinese goods.

The trade spat has been brewing all year, and escalated in the past month. Each country imposed levies on $34 billion of the other’s exports last week. The Trump administration’s new announcement angered Beijing, which is weighing how to retaliate.

Monetary policy is also pressuring the currency: while China’s central bank could cut interest rates or free up banks to lend more in the coming months, the U.S. is set to keep raising rates.

The yuan has now declined 2.8% against the dollar in 2018, retracing gains made early in the year. It has also reversed its annual advance against a basket of currencies weighted by trade volumes, slipping 0.8% against global counterparts, according to a gauge published by Wind Info.

Earlier this year, “the PBOC wanted to use the currency…as a gesture to show the U.S. that they didn’t want to have a trade war,” said

Tracy Chen,

a portfolio manager at Brandywine Global. President

Donald Trump

has often accused China of manipulating its currency to gain a competitive edge.

However, Ms. Chen said she viewed the yuan’s decline since mid-June “as a catch-up depreciation, and a sign that the PBOC threw in the towel.”

A weaker yuan will make Chinese exports more competitive.

A weaker yuan will make Chinese exports more competitive.


Photo:

str/Agence France-Presse/Getty Images

A weaker yuan will make Chinese exports more competitive, helping the economy when growth is showing signs of slowing. But Beijing has controlled the pace of the decline, analysts say. A plunge would likely spark capital outflows, which authorities spent months getting under control after a poorly communicated devaluation in 2015.

Yi Gang,

China’s top central banker, on July 3 pledged to keep the exchange rate “basically stable at a reasonable and balanced level.” While that helped the yuan recover from an 11-month low, it is now approaching that level again.

The yuan fell in morning trading Thursday in mainland China. In recent action, one dollar fetched 6.7008 yuan, according to Wind Info, putting it on track for the weakest close since August. In the offshore market in Hong Kong, where trading ranges aren’t restricted, one dollar bought 6.7156 yuan.

Write to Saumya Vaishampayan at saumya.vaishampayan@wsj.com