By Suwatchai Songwanich
CEO of Bangkok Bank (China)
The impetus for this fall in regional currencies was the yuan, which fell below 6.7 to the dollar in mid-July, down by 4.7 per cent from mid-June, to become Asia’s worst performing currency.
Although the baht strengthened slightly last week the yuan fell to below 6.8 to the dollar on the onshore market.
This precipitous drop came about despite an effort to calm the market at the beginning of the month when the Governor of the People’s Bank of China (PBOC), Yi Gang said the central bank would seek to keep the yuan at “a stable and reasonable level”.
The main reason for the weakening of the yuan, which has been going on since June, is of course the trade war with the United States as China’s currency is depreciating to maintain China’s competitiveness under increased tariffs. It is a matter of debate, however, as to whether this is due to policy, or simply a natural market response.
US President Donald Trump has argued that it is a deliberate policy, bluntly saying “In China their currency is dropping like a rock and our currency is going up and I have to tell you it puts us at a disadvantage.”
The Chinese Foreign Ministry denied that it is a strategy, saying that the currency level is determined by market forces.
The PBOC does, however, play an active role in managing the currency, and in July it lowered the dollar’s reference rate which pushed the currency lower.
It also injected liquidity into the financial system, which also would impact its strength.
Such actions are part of what some describe as China’s “systematic economic defence” to the threatened trade war. These incremental measures include tax cuts, infrastructure spending, encouraging more bank lending and massaging the level of the yuan.
Brown Brothers Harriman chief currency strategist Mark Chandler believes that the People’s Bank of China is trying to ensure that any decline is orderly as it certainly doesn’t want a repeat of 2015 when there was capital flight.
So far it seems to have been successful as during this period there has been no obvious surge in capital flows.
Given the considerable strength on both sides it is difficult to anticipate the outcome of this economic contest between the US and China.
Certainly it is a battle of the titans and Thailand may once again be caught up in the cross-fire.
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