Markets are paying too much emphasis on the yuan weakening to 7 per dollar

There's plenty of talks on capital outflows, warning signals, panic from Chinese authorities and what not. But let's take a step back and evaluate things. This isn't a major game changer from a fundamental perspective. Sure, a decade-long low is something that stands out on the charts but given the context of how we got here, it's not a figure that is the be-all, end-all for China.

Let's first take a look at what's working against the yuan when it comes up against the dollar so far this year:

  • US economy continues to grow solidly, while China's economy slows down a little
  • Fed continues to hike rates as a result, resulting in monetary policy divergence
  • Trade war escalates fear/jitters in Chinese economy, capital outflows seen

Are those factors going to change any time soon? No, they are not. So, while USD/CNY hitting 7.00 sounds massively appealing for headlines it's not something that is going to warrant much change from Chinese authorities.

Are they concerned about a falling currency? Yes, surely they are. But are they in panic mode? No, at least not yet. They may intervene if the depreciation runs too quickly but if the dollar is set to appreciate much more then it's an inevitability that USD/CNY will run higher unless Chinese authorities decide to change their policies with regards to how they manage the yuan exchange rate system - which I don't see happening.

The fact is a falling yuan will help China cushion the blow of further tariffs from Trump on China's exports - since it makes it cheaper to the rest of the world to import from China. And surely Chinese authorities know that. Fighting the trade war is already hard enough and by shooting themselves in the foot (not letting the yuan weaken) it's going to make it even more challenging.

The only thing China risks by doing so is its political relationship with the US. But let's face the facts, it's not exactly like things are going swimmingly at the moment so what's a little more tension to add to that?