Yuan devaluation could dampen China's economy

Beijing's decision to let the yuan fall below the $ 7 threshold was a political option, but economists say the Chinese economy would not be able to "turn its currency into a weapon."

Monday's move to increase the yuan's band of fluctuation was in retaliation for the latest threat from the United States. to set new rates. And while the Chinese central bank has taken steps to stabilize the currency the next day, investors are worried that the authorities will seek to pressure Washington to allow further devaluation.

Although political calculations may dictate this decision, a limitation could be the fear of the impact on the eastern giant's economy, economists say.

"I do not see any benefit for China," said Magnus, MP China Center at the University of Oxford. A depreciation would stimulate trade marginally, he said, but the stability of the currency is much more important for the Chinese authorities, whose main concern is to contain the flight of capital, to avoid a crisis of local debt and to achieve a less motivated economy exports and more for consumption.

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As worries about the global economy and tensions between the US and China intensify, the gold, the yen and the Swiss franc are strengthened and the financial authorities tested.

By
EVA SZALAY

Using the exchange rate as a tool "is a double-edged sword that could hurt the United States and China," said Alan Ruskin, a strategist at Deutsche Bank.

Would a much weaker yuan stimulate the economy? This would help exports to compete internationally and could support growth to a certain extent.

Bo Zhuang, of the Lombard consultant Lombard, points out that the worst economic prospects have led Chinese leaders to open up more to a market-driven depreciation; and Barclays economist Jian Chang said the authorities could badyze it as an alternative to cutting interest rates as a way to stabilize growth.

According to Magnus, a sustained devaluation, much higher – by 20% against the US dollar since the start of the trade war – "would confer a competitive advantage", although it may also lead to retaliation in the region. But the weakness of the exchange rate does not make as much difference in business models as before.

Given global supply chains, exporters' revenues end up being offset by the higher price they pay for imported components. The widespread use of the dollar in international trade billing also limits the benefits.

The risk of further devaluing the yuan is that it could lead to a default of local dollar denominated debt, especially in real estate.

Capital flight is a major concern. When the yuan was put under sustained pressure in 2016, the net outflow of capital for the year amounted to 725 billion dollars. While China had foreign reserves of more than $ 3 trillion, it has exhausted them at an alarming rate to contain the tide.

The main problem is that the weakness of the yuan would hurt Chinese consumers, who pay higher prices for imported products.

Translation: Mariana Oriolo