Beware what you wish for: calls for China to loosen grip on the yuan may rock emerging and developed markets alike, strategists say
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China watchers warn that calls for China to loosen its grip on the yuan may have a chain reaction, impacting both emerging and developed-market currencies. The currencies of Asian neighbors such as South Korea and Thailand are most under threat. A weaker yuan may strengthen the dollar, which historically has had a negative impact on developing nations' foreign-exchange markets. The yuan's stability is seen as an anchor for regional peers, and small moves can have a significant impact. The yuan is showing signs of weakening, and pressure is growing as it approaches the edge of its fixed trading range against the dollar. The People's Bank of China has tools to support the yuan, but traders remember the shock yuan devaluation in 2015. China's gloomy growth outlook and robust US economic data are putting policymakers in a bind. If the yuan weakens, the reverberations will likely be strongest in Asia, with the South Korean won and Thai baht potentially declining further. Central banks in Asia may need to rethink their currency management if the yuan's volatility increases. A spike in yuan volatility would disrupt carry trades and may test the grip of the central bank of China. A weaker yuan may lead to a stronger dollar, exacerbating the pressure on central bankers and governments worldwide. The risk is that the dollar ends up being stronger than anticipated.
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