Christopher ZeniosThe escalation of tariff trade wars between the US and China seems to have prompted the policy shift with the Chinese currency falling below 7 yuan against the US dollar for the first time since 2008.
The fall has happened days after American President Donald Trump announced that he would impose a 10% tariff on $300bn ($246bn) worth of Chinese goods, effectively hitting all of China’s imports to the US with duties.
How is China responsible for the devaluation of the currency?
The yuan is not freely traded with the government able to limit its flow in comparison to the US dollar. Unlike traditional banks, the PBOC is dependent and faces accusations of interference when drastic moves in value occur. Capital Economics Senior China Economist Julian Evans-Pritchard said by linking the yuan’s devaluation to the latest tariff threats, the PBOC has
effectively weaponised the exchange rate, even if it is not proactively weakening the currency with direct intervention.
The weaker yuan results in a more competitive market as Chinese exports are cheaper to buy with foreign currencies. The US has taken this move as an act to offset the result of higher tariffs on Chinese imports going to America.
Although this may seem like good news for those who wish to buy Chinese products this devaluation of currency can result in other issues.
What are the consequences of a weaker yuan?
A weaker yuan impacts imports that are made going into China, making them more expensive and thus driving up inflation and creating strain in the Chinese slowing economy. A lower yuan will also push businesses and individuals to look elsewhere and invest in other assets.
Despite China previously stepping in to prevent the currency reaching this level before market analysts predict that the yuan could see another 5% decrease before the end of the year.
