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Yuan decline helps China in US trade war, at a price
BEIJING, Aug 10, 2018 (BSS/AFP) – The recent fall of the yuan has been a boon
to Chinese exporters facing a trade war with the United States, but it poses
financial risks that could prompt Beijing to prop up its currency.
While markets are spooked by the standoff between the world’s two biggest
economies, a weaker currency makes exporters’ goods cheaper, cushioning the
impact of high tariffs imposed by US President Donald Trump on Chinese
imports worth $34 billion.
Additional levies on $16 billion in Chinese goods will kick in later this
month.
The cushion comes at a price: companies with dollar-denominated debt have
to pay more, and imports trading in the American unit become more expensive.
The Chinese currency, also known as the renminbi (RMB), has sunk seven
percent since June, reaching 6.85 yuan per dollar on Monday — its lowest
level since May 2017. The slide has prompted Washington to accuse China of
manipulating the unit.
“The renminbi’s decline will leave China’s overall exports cheaper on
average in US dollar terms than they were prior to the escalation in trade
tensions,” said Julian Evans-Pritchard, a China analyst at Capital Economics.
And while 70 percent of Chinese exports are billed in US dollars, exporters
adjust their pricing “fairly fast”, Evans-Pritchard said.
Olivier Blanchard, a former chief economist of the International Monetary
Fund, wrote on Twitter that the decline of the yuan was probably enough to
“offset” as much as $250 billion in planned US tariffs.
– Trade war fears –
While it does let market forces play a role, the Chinese central bank keeps
the yuan within a narrow trading band that it adjusts daily, but policymakers
have steadfastly denied that they manipulate the currency.
This time around, analysts say the yuan’s decline is due to market jitters
and not a deliberate move by Beijing.
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“The slide has occurred because of a shift in market sentiment due to trade
war fears and because of concerns over monetary easing by the PBoC (People’s
Bank of China) to address the resulting risks to economic growth,” said
Dariusz Kowalczyk, senior emerging markets strategist at French banking giant
Credit Agricole.
“However, Beijing is clearly choosing not to prevent the RMB’s slide.”
Other experts noted that the central bank had not sold foreign currency
reserves last month, a step it usually takes to support the yuan.
But the PBoC has made other moves to slow the decline. Last week, the bank
increased the amount of money that short-sellers must put aside to bet
against the yuan in order to dissuade the practice.
– ‘No panic yet’ –
While a weaker yuan helps exporters, Chinese importers are left with more
expensive bills to buy products trading in dollars — mainly commodities.
It also puts a burden on Chinese companies that have to pay back dollar-
denominated debts.
The central bank could hit the panic button if the currency falls to more
than seven yuan to the dollar.
“China’s drive to advanced economy status, financial reforms and yuan
internationalisation may be derailed should the currency go into a downward
tailspin,” Christy Tan, head of markets strategy at National Australia Bank,
was quoted as saying by Bloomberg.
The country already experienced a big devaluation in August 2015 that
triggered a capital flight — an event that the authorities are loathe to see
again.
“If confidence wavers, people will sell their yuan-denominated assets,
shares and real estate. Certain sectors will suffer,” Ye Tan, an independent
economist in Shanghai, told AFP.
But Beijing would work to prevent such a scenario by closing the door to
the flow of capital if necessary, Ye said, stressing that there was “no panic
yet”.
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