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The Chinese currency suffered its largest monthly decline in its parity with the US dollar in June, raising fears that Beijing is preparing to use the devaluation of the currency as a weapon in the escalation of the trade war with United States
From 2005 to mid-2014, China systematically intervened on the foreign exchange markets to weaken the value of the yuan, which led to accusations that Beijing was seeking an unfair competitive advantage for its exporters. US President Donald Trump has relaunched these accusations in his 2016 campaign, despite China's policy of supporting the yuan to prevent capital flight.
But in June, the yuan lost 3.3% parity with the dollar, the worst drop in a month since China established its currency market in 1994. Analysts say that until now The movement seems to be more due to market forces than an act of monetary war. They warn, however, that persistent weakness may still fuel trade tensions.
"In the context of a worsening of economic and trade tensions between the two countries, exchange rate fluctuations take on an even greater symbolic meaning than in normal times," said Eswar Prasad, professor of 39, economics at Cornell University and former director of the Chinese division of the International Monetary Fund (IMF).
"The depreciation of the yuan in its parity with the dollar may work as a test of Rorschach.This may be seen as a signal of an exchange rate that further determines the market or an attempt by Beijing to do so. send a message to Washington on another tool of his arsenal in a trade war. "
The yuan was an island of strength. this year, even when the dollar has strengthened in its parity with the euro and many currencies emerging markets. Recent declines are partly due to the effect of land reclamation, according to analysts.
At the end of 2015, China's central bank announced that it would begin to show the stability of the yuan against a broader basket of global currencies. , moving away from a close connection with the dollar. This policy implies that the yuan weakens with other currencies in strong dollar periods.
For now, it is relatively easy to explain the reason for the movement of the yuan in the context of China's efforts to manage its currency. against this basket, "said Brad Setser, former deputy assistant secretary of the US Treasury for the International Economy and a senior member of the Council on Foreign Relations.
" But if it starts to look like a conscious effort to significant depreciation and therefore offset the impact of tariffs, there is a greater possibility that this attracts attention. "
The 1.9 percent drop in the yuan that was recorded last week was the second largest weekly drop, only behind that which occurred in the middle of August 2015, when the People's Bank of China shook world markets by announcing a sudden policy change that triggered a 2.8% depreciation in one week
But the market's reaction to the current weakness of the yuan has been more moderate, though – as in 2015 – the decline in the value of the yuan coincided with a massive sell-off in the markets.China Mainland Exchanges.The Shanghai Composite Index fell 8% in June while signs of a slowdown economic in China were known.
Bo Zhuang, chief economist for China's TS Lombard research group, said that Beijing had probably left a tactical depreciation signal in Washington, but that a devaluation p can be counterproductive for China.
"Many market players speculate that China could use the yuan as a weapon, opting for a devaluation to offset the impact of US tariffs." We do not agree, well that policy makers are now considering the possibility of devaluation as an option, "Bo said.
The People's Bank of China spent about one trillion dollars of its foreign exchange reserves in 2015-16 with the order to combat market expectations of a depreciation. Resuming these expectations can now lead to big risks, Bo said.
"Any profit due to a devaluation of the yuan must be overcome by the negative consequences: the accelerated flight of capital, the restriction of internal liquidity and the possibility of", he said.
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