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Home / Business / China's flagging currency is an asset in the US trade war.

China's flagging currency is an asset in the US trade war.



A lower currency is making China's exports cheaper for foreign buyers, which is of particular help to its companies right now when President Donald Trump's prices make many Chinese goods more expensive on the US market.

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The value of the Chinese currency, the renminbi, has fallen more than 7 percent against the dollar since mid-April, an unusually large move. A lower renminbi makes China's exports cheaper for foreign buyers, which is especially helpful now that Trump's tariffs are making many Chinese goods more expensive in the US market. And since China's government manages the value of its currency, the decline is sure to be a blessing.

Trump said last week in a tweet that the weakness of the renminbi undermined the competitiveness of the United States.

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The Chinese authorities have stated that they are not purposely weakening the value of the renminbi in order to gain an advantage in the trade dispute. And part of the recent decline in the currency may have been caused by economic factors unrelated to trade.

But the renminbi is not free. Its price must rise or fall every day within a range set by the central bank. This range has been continuously reduced.

The recent decline that brought the renminbi back down to last year's level began when the commercial war speech heated up.

While a weakening currency can mitigate economic shocks, it also comes with costs

When China devalued its currency three years ago, fears spread throughout the country's economy and markets around the world.

But for China, the decline in renminbi could have advantages over other responses to US tariffs. Because China exports far more to the US than it imports, it can not respond with tariffs on nearly the same amount of US products.

Devaluations, however, carry a legion of risks.

First, to what extent China may need to weaken its currency is not clear. The decline over the past three months has potentially favored all Chinese exports to the United States, which amounted to more than $ 500 billion last year, and partially offset the impact of previously imposed tariffs. The United States' first tariff on $ 34 billion of Chinese goods in force this month is set at 25 percent.

Other tariffs proposed by Trump for a larger value of goods would be much lower at 10 percent. But Chinese politicians would probably want to avoid a situation where investors and others believed that the level of the currency was directly influenced by the developments in the trade war.

And a big slide could hurt China.

A jump in The Renminbi would come at a difficult time for the Chinese economy. A dizzying increase in borrowing has caused a significant portion of Chinese growth. The government fears that some borrowers will have difficulty repaying the debt and has tried to restrict borrowing. However, such limits can also slow down the economy, which is why some constraints have recently been eased.

Fears of China's debt increased in 2015 when the government made a surprise devaluation.

Renminbi were shunned by individuals and businesses in China and bought other currencies to protect their wealth against further declines in the value of the Chinese currency.

The sale, known as capital flight, indicated that the Chinese had little confidence in their own economy and raised questions about the Chinese center handling the bank's devaluation. The other big fear at the time was that the prices of Chinese goods would fall in other countries, forcing producers to lower their prices and harm the entire economy in the process.

China imposed new "capital controls" that stopped the country capital flight and a revival of the world economy and prices eased concerns about cheaper Chinese goods. The extra controls and the fact that the global economy is in better health could allow China to devalue further without causing much unrest. But it would still be a difficult task, partly because individuals and companies find ways to circumvent the rules.

"Performing a controlled devaluation is one of the most difficult maneuvers a central bank can perform," said Brad Setser, a senior fellow at the Council on Foreign Relations. "China could withdraw by using capital controls and its reserves, but there is a risk that a weaker currency will be seen as proof that China can not guarantee financial stability."

And the factors that may have slowed down the development The sale of the renminbi no longer exists. Robin Brooks, chief economist at the Institute of International Finance, noted that the dollar was significantly weakened in 2017, contributing, he said, to stabilizing the renminbi.

"When the dollar picks up again, it's open to question how well capital restrictions will work to curb potential capital flight," Brooks wrote in an e-mail.


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