[ad_1]
BEIJING – As the United States and China exchange their threats against increasingly restrictive tariffs, the world is watching closely whether Beijing will resort to one of its most powerful economic weapons. It is number 7.
The Chinese currency, the renminbi, has been steadily losing value since mid-April and Tuesday, it was at its weakest point in a decade. If the currency weakens further, it could fall below the psychologically important level of 7 renminbi per dollar. The last time it took more than 7 renminbi to buy a dollar, it was in May 2008, as the world was sinking into a financial crisis.
The Trump administration does not like the idea of a weaker Chinese currency. This could give what he sees as an unfair advantage for Chinese exporters. In the arsenal of trade disputes, currencies can be powerful weapons.
But China has good reason to prevent its currency from weakening and seems to have acted in recent weeks to support it. Coins may be powerful weapons, but they are blunt weapons – and they can explode against those who use them.
What happens if the renminbi falls above 7 for a dollar?
The number 7 is not particularly threatening. The renminbi at 7.002 for a dollar is quite similar to the currency at 6.998 for a dollar.
But to pass this number would have a symbolic meaning. This would suggest that China is willing to let its currency weaken further. This would give an advantage to Chinese factory owners when they sell their products in the United States. It would also undermine Trump's tariffs on more than $ 250 billion worth of Chinese-made products.
How would that help China?
Suppose you have a Chinese plant producing lawn ornaments and sell a lot of flamingos to an American retailer. You pay $ 1 each – they can sell a lot more in the United States, but transportation and warehousing costs are the biggest part. When the renminbi is 6 for a dollar, this translates to 6 renminbi sales.
But when the currency depreciates to 7 dollars a dollar, this flamingo costs 1 dollar and you earn 7 dollars. Or you can reduce the price – for example, from $ 1 to 85.7 cents – while making your original sales at 6 renminbi. Your American competitor, who has to buy and sell in dollars, must reluctantly cut prices to be competitive.
(It's a lot more complicated in the real world.) The plastic flamingo plastic and metal may have been imported to China and the price is in dollars, but be careful with us.)
A weaker currency can also help Chinese exporters beat President Trump's tariffs. At present, the United States imposes tariffs of about 10% on a wide variety of Chinese products arriving in a US port. If the renminbi has fallen by 10%, the tariff is essentially canceled.
What is the engine of decline?
Some politicians in the United States and elsewhere have long claimed that China is manipulating its currency, even though Washington officials – including those in the Trump administration – have not made official accusations. But in this case, many weakening forces are beyond Beijing's immediate control.
The Chinese financial system is tightly controlled by the government, allowing the country's rulers to control what the renminbi is worth. The authorities set a daily reference rate for the renminbi and allow its value to move slightly above or below that level in the currency markets. Chinese officials said daily trading activities helped determine the value of the renminbi the next day, but gave little details about how it worked.
Tuesday, Beijing set this benchmark at 6.9574, a hair stronger than seven. In the world of foreign exchange, a higher figure means a weaker currency.
At present, traders send a message to Beijing: the renminbi should be worth less. The people and businesses that hold the currency have become increasingly nervous about China is experiencing a slowdown in economic growth, a sluggish stock market, a fragile real estate market and a seemingly insoluble trade war against the United States. Inflation has started to rise and rising prices tend to make holding the relevant currency less attractive.
There are other reasons. Since the end of July, Beijing has been trying to support the economy by making the state-controlled banking sector increase its lending, making the currency more accessible. This means even more renminbi, which weakens the value of the currency.
While China has not raised interest rates, the Federal Reserve in Washington has done so. This encourages many people to sell their renminbi and buy dollars. Would you prefer to have a one-year renminbi deposit certificate that pays 1.5% interest now, or a one-year US dollar that pays 2.6 percent or more?
Is the decline deliberate on the part of Beijing?
Not enough. On the contrary, Beijing is trying to prevent the renminbi from falling too fast.
China has several ways to strengthen the value of the currency. One option is to follow the example of the Fed and raise interest rates. This would further encourage Chinese families and businesses to keep their money in China. But that would increase the cost of borrowing in China, even as the economy slows.
Beijing could buy its own currency instead. Like anything else, the value of the renminbi increases when it is rarer.
Thanks to the way it has managed its currency over the years, China has amassed the largest foreign exchange reserves in the world – a $ 3 trillion reserve it retains in dollars, euros, pounds sterling, yen and other currencies. He began to exploit this reserve. When the Chinese central bank released its monthly balance sheet a week ago, it had dropped nearly $ 20 billion in foreign currency in September alone.
"Selling close to $ 20 billion in a month will not blow the bank," said Brad W. Setser, an economist at the Council on Foreign Relations in New York. "But that indicates the direction of the current market pressure."
What are the wider risks?
Three years ago, as China's economy slowed down, China devalued the renminbi to boost its factories. The financial world was shocked. The markets have plummeted.
While the Chinese authorities were quick to explain themselves, individuals and businesses started transferring their money – the money the Chinese economy needed – outside the country. A year later, China had spent more than $ 500 billion from its reserves to strengthen the renminbi. Subsequently, he tightened controls on the financial system in order to eliminate many ways in which people were withdrawing money from the country.
If the trade war intensified, China could seek to adopt more aggressive behavior with its currency. But as history shows, there may be a price to pay.
Source link
