This has not been a strong year for the yuan. The Chinese currency started off with around 6.8 yuan to the US dollar in January and stumbled its way to a little over 7 yuan to a dollar in early August, for the first time since 2008.
While many factors are usually involved in changes in the exchange rate, this year's trade conflicts between China and the US are by far the most important driving force behind the depreciation, said Zhang Ming, an economist and expert in international investment in Beijing.
Neither the US dollar index nor the 10-year treasury rate can explain the yuan's fall, said Zhang in a web article for financial news publication Caixin.
While the dollar has been on the rise in general this year, there has not been a correlation to the yuan’s performance, said Zhang. In May, for example, when the yuan plummeted against the dollar, the value of the dollar remained largely stable, without any dramatic rise or fall. In August, the dollar became stronger, but not as much as the yuan weakened.
Changes in the 10-year bond yield may affect exchange rates, but again, not in this case, Zhang said. So far this year, the Chinese 10-year bond yield has hovered between 3 and 3.5 percent while its US counterpart has been going down. A widening difference between Chinese and US interest rates like the one we are seeing now ought to have pushed the yuan up and clearly do not explain why the opposite happened, said Zhang.
Similarly, short-term capital outflows can be viewed as contributing to some of the downfall of the yuan but not all of it, Zhang argued.
By comparison, fears of the trade war getting worse have had a clear impact on the value of the yuan, said Zhang.
On May 9, the US declared a 25 percent tariff on $200 billion worth of Chinese goods. Then, on August 2, US officials signaled the possibility of a tariff increase to 30 percent on $250 billion worth of Chinese imports. The yuan sharply weakened almost immediately after each of these moves.
Zhang noted that even though the yuan depreciated every time there was bad news about the trade war, it does not mean that China’s central bank deliberately devalued its currency to offset the impact of increasing tariffs. “Worsening trade frictions scared currency holders, which in turn affected the exchange rates,” Zhang said.
Zhang expected to see the yuan continue to respond to whatever happens in China-US trade talks. It will bounce back when the two governments say they will make a deal, as it did last month. It may weaken even more if hostility grows worse, he added.
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