weakening yuan in the forex market.” At least two things stand out from this statement. Te first is that the market- makers are only China’s designated foreign exchange banks, which are more likely to take direction from the PBOC rather than to act on their own initiative to bet against market trends.

Te second point is that the market- makers are hardly likely to acted own,

on given that

the CFETS daily fixing on Aug. 24 weakened by 343 basis points before the agency’s a f t e r - h o u r s announcement of the “counter- cyclical” move. Te CFETS explanation for the change in the “market-based” policy suggests that it has been little more than a feedback loop between the PBOC and state banks. “Te RMB’s value is politically controlled, as it has always been,” said Derek Scissors, an Asia economist and resident scholar at the American Enterprise Institute in Washington. “To the extent there’s any meaningful daily process, it gets thrown out as soon as the political leadership becomes uncomfortable

Forex market-making banks have made adjustments since the beginning of August to offset procyclical sentiment amid a weakening yuan in the forex market

which would otherwise give it a

pricing advantage for its exports to help cope with tariff pressure. Te first is that continued depreciation would raise the risk of capital flight, particularly at a time when U.S. stock markets have set records and Chinese markets have slumped. Te temptation to evade China’s capital controls could lead to even tighter rules. Te second reason is that the Trump administration threatened in

with valuation,” Scissors said by email.

Tere have been at least two reasons for China’s growing discomfort with the decline in the yuan’s value,


July to more than double tariffs on a $200-billion (1.3-trillion yuan) list of goods, raising the planned assessment from 10 percent to 25 percent in order to offset the effect of depreciation on tariffs imposed on China so far. U.S. Treasury Secretary Steven Mnuchin said he would “very carefully review whether


have manipulated the currency,” Reuters reported at the time.

have their

A trap

A l t h o u g h the


cyclical” policy may ease pressure for a tariff revaluation,


poses a potential trap for China and a risk that it may


currency manipulation claims. U.S. trade law defines manipulation as “persistent, one- sided intervention” to weaken a currency to gain an advantage in trade. China’s trading partners are unlikely to complain if the yuan’s value rises, but they may see the “counter-cyclical” push as proof that China turns depreciation on and off at will. “It’s true. China is manipulating its currency,” said a commentator in Barron’s weekly.

FX TRADER MAGAZINE October - December 2018 43 potential

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