World

China’s yuan has its worst fall in years on fears of renewed US rigidity

China’s yuan briefly plunged as much as 1.4% against the US dollar on Wednesday as Trump remained in contention with former Vice President Joe Biden and was projected to win key states like Florida and Texas.

The drop in the offshore yuan, where the currency is traded more freely, is the largest single-day percentage drop since February 2018, according to Stephen Innes, chief global market strategist for Axi.

The offshore yuan eventually pared losses, and was last down 0.7%, or about 6.7 yuan per US dollar. The more tightly controlled onshore yuan slumped 0.6% after falling more than 1% in Shanghai.

“In light of China-US tensions, the [renminbi] market movement hinges on the US election outcome,” according to Ken Cheung, chief foreign exchange strategist for Asia at Mizuho Bank. He wrote in a research note Wednesday that should Trump secure reelection, that would suggest “the extension of America First agenda and protectionism policy.”

The US election wasn’t the only factor that rattled the currency. Chinese regulators also just brought Ant Group’s record-breaking IPO to a stunning halt. That increases uncertainty surrounding Chinese investment, according to Lorraine Tan, director of Asia equity research at Morningstar. Stocks in the region were muted, too, with the Shanghai Composite (SHCOMP) rising 0.2% and Hong Kong’s Hang Seng Index (HSI) shedding 0.2%.
US stock futures tumble on fears of a contested election

But another Trump term could inject new tension into US-China relations, which have been growing more bitter year by year. What started as a trade war has morphed into a broader conflict over technology and national security.

The yuan had been surging against the greenback in recent months as China’s economy recovered from the coronavirus pandemic more quickly than other major nations, and as investors began preparing for a possible Biden win. The currency’s rapid appreciation even prompted the People’s Bank of China to tweak some rules last month in an attempt to slow the rise in value.
“Trump’s victory could reignite the trade war risk,” Cheung said, adding that the return of tariffs could pressure the yuan again. The February 2018 drop came as US-China tensions escalated, and the currency weakened at points last year as the trade war dragged on.

While some market analysts suspected that a Trump victory could bring with it an even more hawkish US stance toward China, economists have pointed out that any US president would take a robust approach with Beijing.

Analysts at JP Morgan wrote in a note last month that even if Biden wins the election, they expect the relationship between Washington and Beijing to continue splintering as the two countries fight over 5G networks, quantum computing, artificial intelligence and biotechnology.

Others also said that a Trump win doesn’t necessarily mean that the yuan will continue losing value in the long term.

Terence Wu, a foreign exchange strategist at OCBC Bank in Singapore, said that the currency would likely be driven by other factors, such as whether China’s economic recovery can remain on track.

“With the pandemic management still the main issue globally, trade frictions may be sidelined for now,” he said.

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