RPT-BREAKINGVIEWS-Yuan is strategic barometer for China post-tariffs

By Hudson Lockett

HONG KONG, April 7 (Reuters Breakingviews) - The first daily fix for the renminbi’s dollar trading band this week reveals much about China's thinking in the short-term about its trade relationship with the U.S. and the rest of the world, but Beijing's long-term strategic calculus is quickly coming into focus too.

A consensus estimate from Reuters had tipped the People’s Bank of China to set the midpoint of the trading band 1.8% weaker from Thursday’s pre-holiday session. That would have offset some of the expected damage to its exports from President Donald Trump's tariff war, but instead the central bank opted for a fix of 7.198 yuan per dollar, or just 0.1% weaker.

There is logic behind this muted move: policymakers do not allow the yuan to make massive moves when there is no urgent reason. Beijing may have surprised by announcing retaliatory tariffs of 34% on all imports from the U.S. in response to Trump’s hike of equal measure on exports from the People’s Republic, but American tariffs do not come into effect until April 9, and China’s retaliatory levies do not land until the day after. That leaves some time for the pair to negotiate.

Ray Dalio, the founder of Bridgewater Associates, suggests China might strengthen the renminbi against the dollar “in exchange for some trade relief”. This is unlikely because Chinese officials view the last such currency appreciation deal - the Plaza Accord of 1985 - as a key factor in Japan’s decades of economic malaise. It is also wrongheaded because China wants a stable, as well as a strong, yuan in the long term to serve as a foundation for its global financial ambitions.

That helps explain why even though U.S. levies on China are already 20 percentage points higher since Trump entered the White House, the renminbi is only down 0.2% against the dollar year to date. Once tariffs hit, however, expect a gradual, controlled grind lower that attempts to avoid any risks of runaway depreciation and large capital outflows.

Beijing also will want to limit the downward pull of the yuan on peer currencies as it seeks to negotiate with its Asian neighbours to hammer out a functioning network of trading partners in a post-tariff world.

The floor to that slow fall may come about 13% below current levels, short of 8.2765 yuan per the dollar, where the dollar currency peg was before China's foreign exchange regime began to liberalise in 2005. The central bank cannot fully halt depreciation, but it can probably slow it enough to buy Beijing time to consider its options.

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CONTEXT NEWS

The People’s Bank of China set the midpoint for the yuan’s trading band against the U.S. dollar just 0.1% weaker on April 7 at 7.198 per dollar in the first daily fix for the currency since Beijing announced retaliatory tariffs of 34% on all U.S. imports. Analysts had forecast a fall of 1.8% for the fix.

The Chinese currency fell 0.4% to 7.3122 yuan against the dollar in early trading on Monday, leaving it 0.2% weaker year to date.

U.S. tariffs on Chinese exports will rise by 34 percentage points on April 9, bringing the total rise since President Donald Trump’s second term began to 54 percentage points unless a trade agreement between the two countries is reached.