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Yuan decline helps China in US trade war, at a price

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11th-Aug-2018       
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AFP, Beijing :
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.  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.

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