China vs. Trump: The strange coincidence of the Yuan fall

C Is this really a coincidence? Could it be that just before the escalation of the trade dispute between America and China, there is a significant movement in the yuan? The currency of the People's Republic, which otherwise moves unobtrusively, suddenly develops a rather unusual dynamic. The yuan has lost about seven percent of its value in recent weeks against the dollar. This week, the downward movement has intensified.

Since then, financial experts have speculated that the Chinese are deliberately weakening their own currency to protect their economy from the consequences of US tariffs. After all, this would make your own products cheaper in the United States and thus offset some of the tariffs. "Such a scenario is very plausible," says Charlie Robertson, chief economist at Renaissance Capital.

If the Chinese central bank, which has a significant influence on the price by fixing the currency, weaken the yuan, it could mean a new front in the Sino-US conflict: a currency war that spreads around the world and more currency could attract. "An open currency war is a very realistic risk," said Neil MacKinnon, strategist at VTB Bank, Bloomberg Financial Services.

It is striking that the yuan has lost value not only in terms of dollars, but also against a large basket of currencies. The trade-weighted yuan, which measures the performance of major currencies of trading countries, has devalued by nearly 4% since mid-June. This is the biggest monthly loss since China has traded its currency in the markets since 1994. The selloff has accelerated after US President Donald Trump has threatened to impose new rules. other punitive tariffs on 200 billion dollars of Chinese goods.

"Since then, the attitude of the Chinese monetary authorities towards a more relaxed monetary policy seems to have changed" writes Robin Winkler, an economist at Deutsche Bank. Just days after Trump's threat, fund managers lowered the reserve rate for banks, creating additional liquidity in the financial system. And more yuan means a weaker Chinese currency under the clbadic law of supply and demand.

Deutsche Bank has already calculated how much the Chinese currency would depreciate, which would make it competitive would remain. Not only are US taxes on Chinese exports included in the bill, but also Chinese countermeasures on US goods and services. And tariffs should not be reflected individually in a cheaper currency. On the contrary, there are certain elasticities.

If Chinese products become more expensive through sanctions, they can not simply be replaced by competing domestic products. And this explains that in the extreme case where all Chinese exports to the Americas are taxed at 25%, the yuan should not be reduced by a quarter.

According to Deutschbank's calculations, in this "heavy scenario of trade war" the volume of Chinese exports to America would fall by $ 72 billion, the volume in the opposite direction, from the United States to China , $ 13 billion. The German economist of the Winkler yuan writes

After that, Beijing should absorb and maintain the competitiveness of China a good third of the necessary devaluation is already behind him. But weakening one's own currency is a risk for the Communist Party. Not only that, Trump could trigger the alarm and threaten other punishments. Already in April, he reported about the Twitter short message service, that such a "devaluation game is not acceptable".

The worst thing is that the financial markets could lose confidence in the yuan and use a large capital flight. Earlier this week, signs of panic began to appear. The yuan broke $ 6.70 per dollar. At the same time, the Shanghai Composite Chinese stock index fell to its lowest level in 28 months.

Beijing was forced to convene the FSDC Crisis Commission, created in November 2017. The Chairman of the Federal Reserve, Yi Gang, stressed after the meeting that the People's Bank of China does not want not use your own currency as a weapon in the trade dispute. Since then, the yuan has stabilized again. The leaders of Beijing want to prevent a situation like in 2015, when a weaker Yuan triggered a real financial tsunami.

For all the advantages of a weaker currency. "The last thing China wants to do now is capital flight," said George Magnus, an expert at Oxford University China Center. The exchange rate is a symbol of trust. "The more a devaluation is disorganized, the more difficult it is to control the situation, with the corresponding contagion effects."

Path of Controlled Devaluation

The Commission for Financial Stability and Development (FSDC) is headed by Deputy Prime Minister Liu He, who, as President Xi's economic advisor, also conducts negotiations with states -United. It includes all the country's financial officers, as well as Yi Gang, head of the central bank and the heads of insurance, foreign exchange and stock market and the highest representatives of the party, justice, security and cyberspace .

The FSDC should help defuse the gigantic problem of China's debt and other financial risks. In fact, a weaker yuan could exacerbate the problem of debt. After all, many Chinese companies have borrowed in dollars. With each percent losing their own currency, debts increase automatically.

According to experts, Beijing should try to take an average course of controlled devaluation. Magnus expects the Chinese currency to fall to seven yuan per dollar soon. Deutsche Bank experts are expecting a similar scenario. There is no chance of coincidence.