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China's luck on yuan devaluation risks running out on Trump ire

Hong Kong

FOR more than a month, China seemed to be enjoying the advantage of exchange-rate depreciation without the global backlash and panicky capital outflows that accompanied the bout of yuan weakening in 2015. Then Donald Trump took issue.

The US president's charges that China is "manipulating" a currency that's been "dropping like a rock" came at the end of a six-week slide in the yuan that took it to its lowest level in more than a year against the US dollar. The remarks, made in a tweet and an interview with CNBC, suggested to market participants that the US-China trade war is now broadening to include currencies, putting fresh scrutiny on Chinese management of the yuan.

After overseeing a slide in the yuan of almost 5 per cent since mid-June, the question for Chinese officials now is whether to turn to other policy measures to support growth in the face of headwinds to exports. JPMorgan Chase & Co analysts, for one, see the dangers of a repeat of the 2015 turmoil as too great for China to keep going with the current approach. "So far China has responded to the trade war by easing monetary policy and letting the yuan depreciate," JPMorgan economists Jahangir Aziz and Zhu Haibin wrote in a note on Friday. "Other measures, particularly fiscal, need to be brought into play soon to relieve the burden."

While the yuan has had effects on markets - for example, futures contracts on the S&P 500 Index, Asian equities and oil all dropped for a time on Friday after China cut the yuan's daily reference rate by the most in more than two years - the impact has been limited. BLOOMBERG

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