China-USA trade war: Yuan plummets

The yuan plummeted on Monday, passing the 7 yuan / dollar mark for the first time since 2008, at the risk of fueling the Sino-US trade war. Around 9:25 am GMT (11:25 am in Paris), the onshore yuan fell to 7.0499 yuan for a dollar for the first time in eleven years, while the offshore yuan, more free, reached in early Asian trade 7,1114 yuan to the dollar, for the first time since 2010.
T o horizon of the reasons and implications of this fall, which comes in full commercial conflict with the United States.

What does the price of a currency depend on?

In principle, in a floating exchange rate regime, the value of a currency evolves according to the supply and demand, which depend on several factors: the balance of the trade balance, the key rate of the central bank , or the level of inflation for example.

Nevertheless, unlike the majority of major currencies, the renminbi (other name of the yuan) is not freely convertible: it can only move against the dollar within a margin of 2% around a determined central rate every day. by the Central Bank (PBOC) – an institution that, unlike its Western counterparts, is not independent.

If the PBOC pointed out in a statement that this depreciation is “the result of market supply and demand and fluctuations in the international money market”, such a move could only have taken place with the assent of institution.

What are the consequences of a weak currency?

When a currency loses its value, the products denominated in this currency see their prices decrease for buyers with other currencies, which favors exports.

After Donald Trump announced last Thursday its intention to extend additional tariffs to virtually all imports from China, the decline in the yuan “can be seen as a relaxation measure to mitigate the impact. taxes, “said Samuel Siew, an analyst for Phillip Futures.

Nevertheless, a weakening of a currency tends to generate a flight of capital, potentially destructive for the economy.

In 2015, the central bank had to intervene actively to curb the fall of its currency, drawing heavily in its colossal foreign exchange reserves to buy yuan … and thus support the course. In the same year, the PBOC also drastically tightened controls on capital movements to contain the pressure on the yuan.

But for Capital Economics firm Julian Evans-Pritchard, China has so far been trying to support its currency “so as not to compromise” trade talks with the United States.

Letting the currency under 7 yuan shows that the Chinese authorities “have virtually abandoned all hope of a trade agreement” with Washington, he said.

What effects for global growth?

The answer to this question will probably depend on the next statements of the American president.

The PBOC’s statement that “unilateralism, protectionism and taxation” is the reason for the plunge will “probably make Donald Trump angry,” Evans-Pritchard said.

“The addition of a new monetary front to the ongoing trade conflict between the two world’s economic superpowers is likely to further exacerbate tensions and potentially hinder the growth of the global economy,” said Ricardo Evangelista, analyst for ActivTrades.

The US president regularly accuses China of manipulating its currency, even though the US Treasury has concluded in its latest semi-annual report that none of the major trading partners of the United States – especially China – has manipulated its currency to take an unfair advantage.

For Han Tan, an analyst for FXTM, the decline of the yuan could also have a domino effect on the other currencies of Asian emerging countries, and heckle their economies.

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