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Yuan falls to 6-month low as China girds for US trade fight

Beijing brandishes currency rate as Washington prepares ban on tech transfers

The Chinese yuan has lost around 4.5% of its value against the U.S. dollar in the past two months.   © AP

TOKYO/NEW YORK -- The Chinese yuan on Wednesday fell to its lowest level in six months, a casualty of U.S.-China trade tensions.

Or perhaps Beijing is using the currency as an errand boy.

Either way, market players see more at play than market forces.

In fact, some experts say the yuan's drop is a warning sign that Beijing is about to ratchet up its countermeasures to tariffs that U.S. President Donald Trump has threatened to impose on July 6.

The People's Bank of China set the official yuan reference rate for Wednesday at 6.5569 against the dollar. A dollar had bought 6.5180 yuan one day earlier and 6.2771 yuan on April 17.

The official yuan-dollar rate is 4.5% lower than it was two months ago, and the yuan has not been this cheap since Dec. 25.

Also on Wednesday, China's benchmark stock index fell to a two-year low. Shanghai's SSE Composite Index ended trading at 2,813.1775, its lowest point since May 19, 2016. The index has lost more than 20% from its recent peak in January.

The Trump administration has been exerting massive pressure on America's trade partners by introducing tariffs or threatening to. His main target appears to be China.

Trump is expected to target China again this week by announcing a ban on companies with a certain share of Chinese ownership from buying U.S. companies that hold important technology. Additionally, Washington is preparing "enhanced export controls" to keep important technologies from being exported to China.

China is unlikely to remain silent. President Xi Jinping made this clear last week at a meeting with global CEOs, mostly from the U.S. and Europe. According to The Wall Street Journal, Xi told his audience, "In the West you have the notion that if somebody hits you on the left cheek, you turn the other cheek. In our culture we punch back."

On the surface, the yuan's weakness looks like it could be attributed to market factors. The dollar is sure to strengthen now that the U.S. Federal Reserve has turned hawkish on rate hikes.

But some market experts say much lurks beneath the surface. China, these observers say, is steadily countering Trump's protectionism with a not-so invisible hand in the foreign exchange market.

China has the tools to hit back in a trade war with the U.S. and could strengthen its position by allowing its currency to depreciate, senior fellow Brad Setser at the Council on Foreign Relations said in a conference call hosted by the think tank.

"The place where the U.S. should be worried, and where China really can respond asymmetrically in a way that would damage the U.S., is the possibility" that the trade war "will prompt China to let its currency weaken," Setser said on Monday.

A weaker currency makes a country's exporters more competitive. And the weakening yuan could also boost foreign investment in China. On Sunday, the PBOC cut the amount of cash that some banks must hold as reserves by 50 basis points, releasing 700 billion yuan ($108 billion) in liquidity.

By increasing the supply of yuan, the central bank also played a part in chipping away at the currency's value.

Toru Nishihama, chief economist at Dai-ichi Life Research Institute in Tokyo, says the weak yuan is a message to Washington. However, he also says it is unlikely that Beijing would intentionally weaken the yuan against the dollar to an excessive degree.

"The PBOC surely remembers the shock of 2015," Nishihama said, "and it will try to avoid delivering another one this time."

In August 2015, the yuan suddenly weakened, shaking not only China's economy but the global market and leaving investors and companies hobbled. Many observers say the currency's fall was directed by government policy as Beijing tried to prop up a slowing economy.

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