Renminbi Series: ‘China weaponizing yuan’ theory may not be right

Chinese yuan has weakened for the fifth consecutive week and from 6.43 to 6.81 per USD as of today, and today, everywhere the news is flashing - China has weakened the daily fix by most since 2016. The People’s Bank of China (PBoC) weakened the fixing by 0.9 percent to 6.7671 per dollar, https://www.bloomberg.com/news/articles/2018-07-20/yuan-slides-after-china-weakens-fixing-by-most-since-june-2016

Some analysts have pointed out that China is once again weaponizing the yuan to benefit its exporting economy, https://www.zerohedge.com/news/2018-07-19/china-weaponizes-yuan-weakens-fix-most-2016

But that theory may not be right.

It is known that weaker exchange rate immensely helps an already export strong economy, more so when exports are major job providing forces. So, a weaker yuan is definitely in China’s interest.

However, this time, they might not be manipulating the exchange rate using their massive foreign exchange reserve of $3.1 trillion. Instead, it is taking actions which are to stem risks of a corporate bond market to prevent a broader contagion which in turn is having a bearish impact on yuan. The biggest problem for China is its massive corporate debt. As of June, China’s debt to the non-financial sector stands at 255 percent of GDP, and the country has been hit by massive corporate debt defaults in 2018, https://www.bloomberg.com/news/articles/2018-07-19/why-china-s-local-bonds-are-defaulting-at-record-pace-quicktake

So faced with this debt mountain and the impossible trinity, https://www.econotimes.com/Renminbi-Series-Chinas-impossible-trilemma-returns-to-haunt-1405122  there is little PBoC can do to maneuver the yuan, especially when it is providing some reliefs to exporters at a time when the U.S. has declared a trade war with the United States.  

Hence the actions taken by the People’s Bank of China has so far been to inject liquidity into the system. In the latest move, PBoC has instructed the banks to expand lending and buy more bonds issued to corporates with the credit rating of AA+ and below, which are usually more susceptible to defaults, using Medium Term Loan Facilities (MLF).