Fall of the Chinese currency, next factor of tension with the EU?

HONG KONG (CNNMoney) –

Could the Chinese Currency Become a New Trigger in its Commercial Struggle with the United States?

The Chinese yuan has fallen more than 3% against the dollar in the past two years, because tensions between the two largest economies in the world have worsened. Both sides have threatened waves of new tariffs on exports from the other country.

A rapidly weakening yuan has caused riots in world markets in the past, and has received criticism from the United States.

Why does the yuan fall?

By accusing China of unfair trade practices, US President Donald Trump has threatened to hit the country with tariffs on hundreds of billions of dollars in exports. Beijing has promised retaliation

which has raised concerns among investors: trade barriers can 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 interest rates this year. This makes assets in US dollars more attractive to investors, increasing the value of the dollar against other currencies.

The central bank of China is on a different path. He is preparing to release more than $ 100,000 million into his 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 the year 2017 and the beginning of this year to strengthen against the dollar.

Lee: Why are markets afraid of US restrictions on China?

Chinese equities entered a bear market this week, falling more than 20% from its recent peak.

But some market observers are not yet afraid of the fall of the yuan.

We see a dramatic selloff of panic in the yuan market up to now, "said Ken Cheung, currency strategist at Hong Kong-based Mizuho Investment Bank.

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 analysts do not believe this is the reason for the recent declines in the yuan

"The main reason is a stronger dollar, not that China is aiming for a weaker yuan in the trade dispute with the United States, "said Hao Zhou, a Singapore-based exchange analyst at Commerzbank investment bank

. being relatively strong compared to the currencies of its other main trading partners, such as the euro. And other emerging market currencies, including the Indian rupee and the Turkish lira, have also fallen against the dollar.

The Chinese authorities are aware that if the yuan falls too much, this could generate new tensions with Trump, who could renew his accusations of currency manipulation.

"This is not in the interest of China," said Zhou

What does a weaker currency mean for China?

The cheap yuan can also create problems for the Chinese economy.

Chinese companies have accumulated huge dollar debts in recent years through bond sales in Hong Kong, according to financial data provider Dealogic. When the yuan falls against the dollar, it increases corporate debts

The situation is "worrying that companies that issue large debts in US dollars may have difficulty paying their debt, paying it or refinancing it "said Tai Hui, director of Hong Kong-based market strategy for Asia, for financial management company JPMorgan Asset Management.

Lee: Which economies are most exposed to a stronger dollar? ]

If the yuan falls too fast, it could also cause large amounts of money to leave China as investors lose confidence and seek to exchange the currency for assets in dollars and dollars. Other currencies.

Important periods of market volatility in China in 2015 and early 2016.

The Chinese government "will ensure that falls C is another attack of capital outflows," said Mark Williams , chief economist for Asia at the Capital Economics research company.

What will happen next?

Analysts believe the Chinese government "Any profit for exporters would be canceled if the depreciation resulted in economic and financial instability," said Williams in a note to customers this week.

If the currency continues to fall, China's central bank could take steps to support it by selling dollars out of its huge foreign exchange reserve.

But some experts suggest that the dollar should not increase much more. Sim Moh Siong, a currency strategist at the Bank of Singapore, said that a full-fledged trade war with China would also hurt the US economy by weakening the attractiveness of dollar assets.

"The periods of protectionism in the history of the United States have been associated with a subsequent weakness of the US dollar," he said.