China may devalue Yuan in the trade war

China may devalue Yuan in the trade war

WashingtonRoyale

President Donald Trump and his administration have renegotiated its trade agreements with Mexico, Canada, European Union and South Korea. Now, the Trump Administration wants United States to focus on Chinese exports, Chinese currency and the issue of devaluing yuan as it focuses on its biggest trading partner. In tackling China, President Trump may enjoy domestic support from its political constituency that worries about China’s military growth and assertive activities across Asia, especially in the South China Sea. However, this political support needs to be balanced with its urgent need to handle trade issues, intellectual property issues and where the Chinese side is adhering to the global trade norms in letter and in spirit.

This China’s currency manipulation and the topic of Yuan’s devaluation is such a serious matter that President Trump himself is personally watching Yuan’s steady decline.

If Chinese reduce the value of Yuan by 10 percent then importers of Chinese goods will see a 0-1–2 percent rise in the cost of Chinese goods. It is because the exchange rate cost to buy the Chinese good will fall, and any levied tariffs today will become “inconsequential” bringing the final price tag to pre-tariff days, so companies won’t feel much difference. Yes, there are other domestic economic considerations by China, but this act is not out of question now.

On the topic of currency devaluation, the new Q3 monetary policy implementation report by the People’s Bank of China, the Chinese Central Bank (PBOC) says it will keep the yuan’s exchange rate at an equilibrium level. In this report, the central bank pledges to “reinforce macro-prudential management to keep the yuan exchange rate at reasonable and equilibrium level, if necessary”. This report suggest that PBOC has been using its foreign exchange reserves to intervene in the currency market on the yuan’s behalf since August 2018; it also clearly hints that PBOC may let its currency Yuan go above their ideal threshold of 7.00 per USD to reduce the pain of trade war.

Unless something drastic happens at the upcoming G20 meeting with President Trump and President Xi, this trade war now shows clear signs of turning into a currency war soon thereafter.

There are many reasons why President Trump should not let this ill-advised trade war become a truly harmful currency war at any costs. It will no doubt spook the global stock markets from the European Union to Asia to North America. It comes with many unintended economic consequences, including the worsening issue of inflation, and rising interest rates in the United States would also come into play.

The renminbi devaluation is a very worrisome development in itself, not because it represents an unwelcome and unwise move by the Chinese government, but rather because it reflects a weakness in the world’s second largest economy at a time when the world economy itself is showing few signs of strength.

Within reason, the world’s top two largest economies are very intertwined together and dependent on each other that it just cannot start hurting the other without hurting itself in the process. This is an issue that surpasses the particular actions of any one U.S. administration. Chinese success in economic sphere is intertwined and complements the actions of U.S. There will always be complicated issues, but it just cannot become such vicious rivalry that drastic steps are required resulting in long-term strategic harm to each other. I think it is time for the Trump Administration to find a quick way possible to end this trade war before things get out of hand, and we all end up in a currency war soon.

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