Remaining vigilant on currency

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Remaining vigilant on currency

The global markets closely watched the yuan’s movement on Tuesday, the first trading day for the Chinese currency after authorities changed the composition of a currency basket to determine the central parity rate of the Chinese currency. China’s central bank set the official yuan midpoint at 6.9498 versus the U.S. dollar, compared with the previous close at 6.9467.

The yuan lost nearly 7 percent against the greenback last year. Global bankers bet on the weakening of the Chinese renminbi this year while differing slightly on the pace and time. But most agree that the currency will trade above 7.0 to the dollar, while some predict it to fall as far as 7.4 yuan.

The 7 yuan threshold would be a double-edged sword for China. Cheaper currency could help growth and exports, but at the same time accelerate foreign capital’s flight out of the country. Beijing has abundant foreign exchange reserves of over $3 trillion. But it faces Donald J. Trump as the U.S. president, who repeatedly threatened to label China a currency manipulator and slap trade barriers against it.
When the yuan depreciates against these threats, the money tide leaving the country could become faster, wreaking havoc on the capital and equity market and shaking the economy. This is why the People’s Bank of China did what it could to keep foreign exchange reserves above the $3 trillion threshold. But the market believes the central bank cannot go on defending its prized reserves for long.

The Korean won traces the Chinese currency. The won has been included in China’s new currency basket, which determines the exchange rate of the yuan. The won now takes up 10.77 percent in the basket of 24 currencies, the fourth largest weight after the dollar, euro and yen. In other words, the Korean won has become more closely coupled to the yuan.

We cannot predict the effects of the weakening of the yuan. It would be favorable for Korean shipments if Chinese exports increase. But a weaker yuan would also weaken the won and encourage foreign capital to leave the local market. The yuan’s depreciation would also hurt Korea’s export competitiveness. Local authorities must remain vigilant.

JoongAng Ilbo, Dec. 4, Page 30
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