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Can the Chinese Currency Become a New Critical Point in its Commercial Struggle with the United States?
The Chinese yuan lost more than 3% against the dollar two weeks as tensions between the two largest economies in the world worsened. Both parties have threatened waves of new tariffs on their respective exports.
A rapidly losing Yuan caused turmoil in world markets in the past – and attracted criticism from the United States.
Here is what is happening right now:
Why does the yuan fall?
Accusing China of unfair trade practices, President Donald Trump threatened to hit the country with hundreds of billions of dollars in exports. Beijing has promised to fight back.
Investors worry that new trade barriers may inflict significant damage to the Chinese economy, which is already showing signs of slowing down.
Another reason is the strength of the US economy, which has led the US Federal Reserve to raise its interest rates this year. This makes badets in US dollars more attractive to investors, driving up the value of the greenback versus other currencies.
Related: The Chinese economy is showing signs of slowing down. A commercial war will not help
The Chinese central bank is on a different path. It is expected to release more than $ 100 billion into its financial system because of concerns about the health of the economy.
A dollar now buys more than 6.6 yuan, the lowest level of the Chinese currency since December. The yuan had spent most of 2017 and the beginning of this year has strengthened against the dollar.
Another index of investor nervousness, Chinese equities entered a bear market this week, falling more than 20% from their recent high.
But some market observers do not panic yet about the fall of the yuan.
"We do not see any dramatic panic in the yuan market so far," said Ken Cheung, Hong Kong-based bank strategist Mizuho.
Does China weaken its currency by design?
A weaker yuan could make China's huge export industry more competitive globally, as it would make Chinese products cheaper for buyers who pay in dollars . In the past, Trump repeatedly accused China of manipulating the value of its currency to achieve it.
But badysts do not believe that's the reason for the recent declines in the yuan.
"The main reason is a stronger dollar, not China targeting a weaker yuan in the trade dispute with the United States," said Hao Zhou, a Singapore-based monetary badyst at Bank of America. Commerzbank investment.
Related: The White House decides not to cap Chinese investment
It emphasizes that the yuan is still relatively strong compared to the currencies of its other major trading partners, as the l '; euro. And other emerging market currencies, including the Indian rupee and the Turkish lira, also collapsed against the dollar.
The Chinese authorities are aware that if the yuan falls too much, it could fuel new tensions with Trump, who could resume his accusations of handling the currency.
"This is not in the interest of China," Zhou said.
What does a weaker currency mean for China?
A cheap yuan can also create problems for the Chinese economy.
Chinese companies have accumulated huge debts in US dollars in recent years through bond sales in Hong Kong, according to financial data provider Dealogic. When the yuan slips against the dollar, it is more expensive for companies to repay these debts.
The situation is "worrying that companies that have been issuers of US dollar debt may face difficulties in repaying or refinancing their debt," said Tai Hui, chief strategist for Asia at JPMorgan Asset. Management.
Related: Chinese stocks enter the bear market as the trade war heats up
If the yuan falls too fast, it could also result in large cash flows out of China exchange it for badets in dollars and other currencies. This occurred during the last major periods of Chinese market volatility in 2015 and early 2016.
The Chinese government "will remain cautious that sustained declines could trigger a further capital outflow", said Mark Williams, Chief Economist for Research. Capital Economics company.
What happens next?
Analysts believe that the Chinese government will only tolerate the fall of the yuan.
"Any benefit to exporters would be overwhelmed if depreciation resulted in economic and financial instability," said Williams in a note to customers this week.
If the currency continues to slide, the central bank of China could take steps to support it by selling dollars from its huge currency chest.
But some experts suggest that the dollar will probably not increase much further. Sim Moh Siong, currency strategist at Bank of Singapore, said that a large-scale trade war with China would also hurt the US economy, thus weakening the attractiveness of dollar badets.
"Periods of protectionism in the history of the United States have been badociated with the subsequent weakness of the US dollar," he said.
CNNMoney (Hong Kong) First published June 28, 2018: 2:53 am ET
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