How the currency war continues after the Chinese movement

It should be recalled that the yuan did not trade at these prices (7 units per dollar) since May 2008, when the Beijing government decided to devalue the currency to cope with the financial market meltdown. But with the arrival of Trump and his badault on sales in China seized the yuan, which continued to suffer throughout 2017. The fundamental difference is that at that time, Beijing had bought yuan on the market to curb the falls. The Chinese central bank has spent hundreds of thousands of dollars on its reserves over the past two years to prevent the yuan from breaking the $ 7 barrier. But he seems to be fed up and the patience of the government of Xi Jinping It has deteriorated in the face of the new tariff threat. The administration has for a long time Trump He accused Beijing of manipulating the yuan to improve the competitiveness of its products globally. Although the paradox is that China holds the yuan. But after the devaluation of the yuan, the US Treasury decided to formally qualify China as a "Coin Handler". Although the rating is largely symbolic, it provides political ammunition to Trump justify new tariffs on China, at the risk of materializing a currency war.

A weaker yuan means cheaper Chinese exports in dollars, which would help offset the negative effects of the new US tariffs.., although Chinese imports are more expensive. The exchange rate is therefore an effective weapon for mitigating the consequences of tariffs. According to experts, if China drops the coin, an additional 8% can completely offset the last rate round. Although the depreciation of the yuan has negative effects, such as increased risk of capital outflows, as long as devaluation is orderly, volatility is controlled and speculation is controlled, risks will be minimized. China's central bank has denied US accusations. and attributed the devaluation to the impact of protectionism and new tariffs on Chinese products. This does not hide the link between depreciation and duty, which means that the exchange rate has become a weapon. This partly reflects the fact that China has lost all hope of reconciliation. Beijing, instead of calming the conflict, decided to react and not just with the currency, so vetoed imports of US agricultural products. China still has another arsenal to respond to the latest attack from TrumpIn addition to limiting imports of agricultural products, it may prohibit the export of rare earths or the suspension of the purchase of US Treasury debt. However, none of these tactics is enough to offset the impact of additional tariffs on more than 500,000 Chinese products.

The most obvious consequence of all this is a tightening of trade relations between China and the United States. Like this Trump It will continue to insist that additional tariffs only rectify the unfair advantage that China derives from a manipulated currency and that the dollar is too strong. There is therefore enough reason to blame the Fed for keeping the interest rate too high.

It would be difficult to wage a complete currency war since the historic interventions of the United States. Against the foreign exchange market, they proved to be largely ineffective and a lasting depreciation of the yuan could lead to capital flight into China. However, With a Chinese government that feels safer with a weaker yuan and an increasingly firm US policy, the risk of a currency war can not be ruled out. For the moment, the operators of the global currency market are expecting a steady depreciation of the yuan, even at an erased rate. It is likely that Beijing will tolerate further weakness, in the order of 5% by the end of the year.

The truth is that the yields of US Treasury bonds. and stock prices have already collapsed in response to growing concerns about the trade and now monetary war, which is already at the center stage. The IIF has already notified. Alerts continued yesterday: there was already a strong reversal of capital flows to emerging countries.