Why it matters: The depreciation of the currency, officially known as the renminbi but often referred to as the yuan or CNY, is symptomatic of the deep problems facing the world’s second largest economy.
The big picture: The Chinese policymakers influencing the currency have historically drawn a line in the sand around the 7-per-dollar level and seemed to loathe it above that price.
- The yuan has weakened by as much as 10% against the dollar in the past six months, hovering around 6.96 per US dollar on Thursday (though it strengthened slightly to around 6.92 on Friday).
How it works: Unlike the US dollar, which floats freely in the market without daily government intervention, China’s exchange rate is governed by a managed float system.
- Essentially, the government sets an official price every day and market prices are allowed to fluctuate by 2% above and below the government figure.
- If the government does not want the price to exceed a certain level, it gradually shifts the official price away from that number. The last time the yuan crossed $7 per dollar was during the height of the trade war in 2019.
- At the time, the move was was seen as a signal from Beijing that it would take strong steps to counter the impact of the Trump administration’s tariffs — as a weaker Chinese currency makes Chinese exports cheaper for US buyers.
What they say: Currency analysts expect the yuan to pass $7 per dollar soon, saying this is a sign that Chinese policymakers are increasingly concerned about the slump in their economy.