Yuan's Slide May Have More to do With Economics Than Donald Trump

FeaturesDow Jones Newswires

BEIJING -- Donald Trump has accused China of driving down the yuan, but Beijing' recent moves to let its currency weaken faster than expected appear to have more to do with the country's worrying property bubble as well as the dollar's broad strength than with sending a message to the U.S. president-elect.

Behind the yuan's rapid depreciation lately lurks a bigger concern among Chinese policy makers and economists over the country's own economic situation, according to officials and analysts: Regardless of who is in the White House, the government may have to accept a much weaker yuan because of worrying asset bubbles -- especially in China's property market -- and continued reliance on stimulus to prop up growth.

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That heightens the risk of a yuan feedback loop that likely would be driven less by outside forces, the people say: The recent rapid run-up in property prices in many cities, for instance, is sending more Chinese looking to foreign markets to park their money, potentially exacerbating capital outflows that drive down the yuan further.

"For the foreseeable future, asset bubbles and uncertainty over China's growth likely will be the main factor playing into renminbi's depreciation expectations," said an economic adviser to the Chinese leadership, using another name for the yuan.

On Wednesday, after the dollar strengthened overnight, China's central bank, which controls the yuan's trading in the mainland market, set the currency's official rate, or "fix," at 6.8592 per dollar -- its weakest level in more than eight years. That brought the yuan's loss against the dollar to nearly 1.4% in the week since the Mr. Trump won the White House.

For now, investors have largely taken the yuan's slump in stride, as it is in keeping with the dollar-driven exchange-rate mechanism the central bank put in place early this year. Investors are also aware that Beijing has the tools to prevent a free fall in the yuan. But some Chinese officials and investors are questioning whether the central bank is prepared for a sustained dollar rally under the Trump administration.

The skeptics compare the yuan's most recent tumbling to its drop following the U.K.'s unexpected vote to leave the European Union five months ago, which also threw currency markets into turmoil and sent the dollar soaring. Then, the People's Bank of China quickly said it had put contingency plans in place and would keep the yuan stable. This time, the central bank hasn't made any public statements.

In recent days, the PBOC hasn't conducted any large-scale intervention intended to support the yuan, according to currency traders. The relative hands-off approach, China experts say, underscores Chinese officials' overall wait-and-see attitude toward Mr. Trump and which campaign pledges he will take action on.

The PBOC declined to comment on the yuan's recent moves.

On anticipation of higher interest rates in the U.S. and a continued dollar rally, a number of investment banks including UBS, HSBC and Standard Chartered have in recent days lowered their year-end projections for the yuan to around 6.9 per dollar.

"While China's highly controlled exchange-rate regime may have saved the yuan from a dive like the Mexican peso, we believe the pressure will still manifest itself" through the potential for growing trade tensions between the two countries, said Harrison Hu, chief China economist at Royal Bank of Scotland Group in Singapore.

Some officials close to the country's economic mandarins are hoping that Mr. Trump will be pragmatic in his dealings with Beijing as both countries stand to lose from trade or currency conflicts. Meanwhile, executives at some big Chinese companies that sell to the U.S. markets are trying to put together a Plan B in the event of a much tougher U.S. stance on trade under Mr. Trump.

Chinese outflows continue: Its foreign-exchange reserves plunged $45.7 billion in October from the previous month to $3.12 trillion. The stockpile of foreign currencies eroded by more than half a trillion dollars last year.

Beijing in recent months has sought to rein in bubbles in China's bond and property markets and the central bank has refrained from aggressive monetary easing measures while trying to ensure liquidity in the financial system.

But the government also is treading carefully not to cause a sharp drop in home prices because home sales have buoyed a slowing economy as other growth engines like manufacturing and business investment remain lackluster. Authorities may need to keep interest rates low for a while to support housing prices and China's overall growth, said Zhu Chaoping, China economist at UOB Kay Hian Holdings Ltd., a Singapore-based investment bank. That would translate into more room for the yuan to depreciate, he said.

The central bank has previously dismissed suggestions it is sacrificing the yuan's exchange rate to support the property market. It said in its third-quarter monetary-policy report released last week that would be "too big of a price" to pay, resulting in "structural distortions" and "accumulation of debt." It said China will maintain a "prudent and neutral" monetary stance.

Still, if authorities keep printing money aimed at bolstering growth, economists warn, that ultimately would lead to a sharply weaker yuan.

"If money supply can't be effectively controlled, then the path of depreciation would be a long one," said Li Xunlei, chief economist at Haitong Securities, a big brokerage firm in China.

Write to Lingling Wei at lingling.wei@wsj.com