Day by Day, the Chinese Yuan Gets Weaker Against the US

USD to CNY Chart

Over the last 5 years, the currency has gone from approximately 6.05 : 1 to a 6.9 : 1 in relation to the U.S. dollar, a 14% decrease in the value of the Chinese RMB.

 

Why?

The People’s Bank of China claimed that the depreciation was not to boost export revenue but for China to move towards a more market-oriented economy.

 

What a weaker currency means for China:

China’s export industry becomes more competitive globally, their GDP continues to grow exponentially due to a balance of trade surplus. In fact, Trump’s tariffs on Chinese imports are actually causing Chinese businesses to improve their technology and become more competitive.

Some of the consequences of a weaker currency are the increase in US dollar debt from the stock exchange. Also, the GNI will decrease as investors lose confidence in the Chinese RMB, causing large amounts of money flow out of China.

On the other hand, the US economy is very strong, which led the US Federal Reserve to raise interest rates this year. Hence, this attracts investors to buy US dollar assets.

 

Caption: Above is the US current account data over the last 5 years (Trading Economies/U.S. Bureau of Economic Analysis

 

Is China intentionally making their currency weaker?

Most analysts and economists believe this is not the case.

“The main reason is a stronger dollar, not China aiming for a weaker yuan in the trade dispute with the United States,” said Hao Zhou, a Singapore-based currency analyst at investment bank Commerzbank.

It seems likely that this is a China-US problem as Trump has initiated a trade-war with China and the Chinese RMB still relatively strong compared to other currencies such as the Euro, Turkish lira, Indian rupee, etc.

 

In the future:

Analysts believe sooner or later the Chinese government will want their currency to appreciate again. China’s central bank could try and solve this buy selling from its huge number of foreign currency assets. The US should stop pressuring China with tariffs as well, because according to Sim Moh Siong – currency strategist at the Bank of Singapore:

a full-blown trade war with China would also damage the American economy, weakening the appeal of dollar assets.

“It’s harder for [the dollar/yuan rate] to slide beyond 7.0 in a sustained manner given that there is more in the Chinese authorities’ policy toolkit should the need arise to further contain CNY depreciation pressures,” said Bank of Singapore currency strategist Sim Moh Siong.

Sim Moh Siong states it is only possible the currency exchange will go over 7 to 1 if Trump continues with implementing large tariffs on Chinese goods.

 

Some information about the trade war:

The trade war is allowing China to become more self-sufficient. There will be much more attempts at domestic innovation with pressure from the tariffs and the ongoing trade war. China used to be reliant on American technology, but all that could change.

The US Commerce Department starkly exposed China’s reliance on American technology this year when it blocked US companies from selling vital components to Chinese telecommunications hardware maker ZTE, forcing it to halt almost all of its operations.

However, according to Scott Kennedy, an expert on the Chinese economy at the Center for Strategic and International, it will be difficult for China to expand its technological industry in the short term. The reason is Chinese companies have always relied on American-made components and mini-components to build smartphones and mobile networks.

On the other hand, in the US, more jobs will be created by exports to China, the unemployment rate is greatly reduced. There have been more investments in the US currency, the US is bringing in a lot more money internationally which consequently is increasing their GNI.

This trade war seems to be benefiting the US in the short term, but in the long-term, it seems China will be gaining the spoils of war and continue to develop faster than before.

Alternative perspectives:

According to Brett Ewing, Chief Market Strategist of First Franklin says that China will “lose” the trade war with the U.S. and this will be a detriment to the government, but it will benefit the citizens. Firstly, China will become more of a free market economy, low barriers on trade and less governmental control benefits consumers of any country.

Also, Ewing predicts that upon loss of the trade war, China will be able to make home-buying cheaper for the new generation. This can help shift China’s living standards in the right direction by lowering the cost of living as well as boost the economy.

Useful Sources:

https://money.cnn.com/2018/06/28/investing/china-currency-yuan-trade-war/index.html

https://www.investopedia.com/trading/chinese-devaluation-yuan/

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