Sharp decline of the Chinese yuan mitigates the impact of the trade war

July 22, 2018 7:57 pmComments Off on Sharp decline of the Chinese yuan mitigates the impact of the trade warViews: 24

Chinese yuanThe Chinese currency fell sharply, reaching its lowest value in the past year, which is great relief from exporters, but risking to raise Donald Trump’s anger within the trade war.

Since April, the local currency has lost 10% of its value against the US dollar, giving advantage of the Chinese producers on the US market. This is a sharp decline, which happens at a time when Washington has just imposed penalties on nearly 7% of the products it imports from China each year.

The decline in the yuan is offering a non-negligent compensation to Chinese exporters because of their reduced competitiveness linked to rising US tariffs.

The US imposed a 25% duty on Chinese goods worth 34 billion USD in annual imports. China responded with the same measure to the same volume of US imports. But the US president said he was ready to hit all Chinese exports or goods worth 500 billion USD.

Donald Trump accused China of unfair competition, pointing to the 375 billion USD trade deficit that the US reported last year in its commodity exchange with the Asian giant.

On July 19, in violation of the tradition, the US president also criticized the US Federal Reserve Bank’s monetary policy, stating that it has led to a rise in the US dollar exchange rate.

The currency of Beijing is not entirely convertible and the Chinese central bank each day sets a 2% deviation around the leading rate. Thus, on Friday, it set a rate of 6.77671 CNY for one US dollar, and this was a drop of nearly 1% from the previous day.

This is the biggest one-day decline in two years, and it tells analysts that Beijing seems so satisfied with the decline in the yuan’s exchange rate and refrains from foreign exchange interventions where it could sell dollars.

The behavior of the Central Bank of China represents the beginning of a currency war. Only a month ago, China denied that it wanted to conduct a currency war in response to Trump’s actions, but many things had changed for a month.

But in a more distant perspective, the sharp decline in the yuan still hampers the Chinese economy.

The Chinese currency has lost positions since the summer of 2015 and because of the stock market crisis, which has led many depositors to invest abroad. But, faced with this capital flight, Beijing then sought to protect its currency, which was regularly recovering throughout the past year.

The trend reversed from the beginning of the year amid the threat of a trade war, the slowdown in economic growth and the monetary and budgetary revival.

On Friday morning, the yuan fell to 6.7943 CNY for one US dollar, down 0.28% from the previous day, and then slightly recovered to close to 6.78 CNY at the end of the day, generating rumors that the central bank to intervene in the foreign exchange market.

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